Find out which two books changed this investor's approach to retirement planning
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Having your contact details on display in a number of widely-read newspapers every week can, over time, generate a significant response from readers regarding all manner of subjects, although the question I’m most frequently asked is where do I invest.
My response, which may sound deliberately elusive (though that’s not intended), is ‘it depends upon what I’m investing for. And when.’ Let me explain.
Twenty-five-odd years ago, for instance, my wife and I were, like most other 30-somethings with a family, conducting an almost permanent financial juggling act in a not always successful attempt to ensure that our income exceeded expenditure. We were weighed down by a massive mortgage, the size of which never appeared to get any smaller, thanks mainly to prevailing interest rate levels.
As base rates have remained inconceivably low for so long, it’s difficult for today’s 30-somethings to appreciate the often financially debilitating impact of double-digit interest rates commonplace in the late 80s and early 90s.
For example, as the 1980s drew to a close, the Bank of England increased base interest to 14.88%. That’s not a misprint. For the whole of the 1990s, rates never fell lower than 5% and stayed much higher for much longer, peaking at 13.8%.
Getting rid of the mortgage as quickly as possible had been our original intention, but monthly mortgage costs escalated to such a degree that that target became an increasingly distant dream.
Fortunately, as the new century dawned, interest rates began to tumble, giving us an renewed opportunity to meet our goal.
From a savings / investment perspective, we threw everything at it, hopeful that interest rates wouldn’t suddenly surge again and that the high-yielding investments we held would increase the rate at which we could pay it off. Achieving our goal took much longer than expected, but goodness, was it satisfying; I can assure you that when the balance was eventually reduced to zero, we celebrated in some style.
Mortgage slaughtered, it wasn’t long before the prospect of retirement (or at least winding-down) poked it’s head above the horizon. By then, returns on savings had plummeted; indeed by next February, interest rates will have been 1% or lower for 12 years.
Our investment focus over this period has been to ensure we can live comfortably when we eventually finish work. Obviously, keeping money on deposit in a bank doesn’t fit with this strategy when interest rates offer little reward.
A friend asked me recently ‘do you worry about running out of money in retirement?
I’m not a worrier, but as interest rate returns are effectively negative once you take the corrosive impact of inflation into account and stock markets have been a tad volatile over the past decade, it struck me as prudent to amend a once gung-ho investment style and develop something more suited to our longer-term needs.
This change in tack didn’t happen overnight, but occurred as a result of speaking with finance professionals, similarly-aged friends and reading around the ‘retirement planning’ subject.
Two books in particular stand out.
The Number, by American writer Lee Eisenberg, makes you think about your financial future but it’s actually about the life you want to lead and how much you need to satisfy your ambitions. Everyone’s number is, therefore, different.
Investment Demystified, by Lars Kroijer, is a more formal, but very readable analysis of how to execute a very simple, but effective, investment strategy without investing speculatively. Prior to reading Kroijer’s comparatively short book, my ad hoc investment strategy was constructed around notes made over several years, calculations of future income, newspaper clippings, reports into equities and different sectors.
After finishing Investing Demystified it became clear that this ‘investment clutter’ could be jettisoned as Kroijer shows how anyone can build what he calls a ‘rational portfolio’ designed to reduce risk. He asks when you invest, do you enjoy an ‘edge’ over other investors, including fund managers and banks among others. The answer, of course, is unless you have inside knowledge of a company’s activities, (which is probably illegal), you don’t. Accept this, says Kroijer, and invest simply.
Will Kroijer’s approach make you ridiculously wealthy? Probably not, but having battled against the effects of high interest rates for almost two decades, then contended with them being anchored at historically low levels for the past dozen years, the simple, no-nonsense approach to achieving our ‘Number’ certainly makes investing stress-free.
Is your longer-term ‘Number’ likely to be affected by historically low interest rates? If so, you may wish to consider accessing the wealth accumulated in your property, but how much could you release from your home?
The figure is determined primarily by your age, health and your property’s value, which must be at least £70,000. These are the principle requirements, although alternative options exist based upon personal circumstances. You can get a very good idea of how much equity you can release by visiting the Moneymapp.com website and filling out the equity release calculator.
It’s worth noting that equity release isn’t a panacea. It’s not suitable for everyone and it may compromise your eligibility for means-tested state benefits.
As many readers have already discovered, there’s a wealth of information to be discovered at www.moneymapp.com/equity-release.
In addition, there are hundreds of blogs and articles dealing with the subject on the Moneymapp website, including Peter Sharkey’s weekly blog, rated among the UK’s very best. Read more at www.moneymapp.com/blog
You may still email any queries or questions regarding equity release to firstname.lastname@example.org but please note that Moneymapp.com cannot advise readers on whether equity release is suitable for them. However, Moneymapp.com can introduce readers to professional advisers who will explain the process and its implications for your estate and entitlement to means-tested state benefits.
Bank of Mum & Dad to the rescue
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