Taking control of your financial future

In my last article, “What would you do if you knew you could afford it?” I explored how the experience of living through this pandemic over the last 6 months has prompted a number of us to reassess our lives and priorities.

In this article we’re going to look at the 7 key areas of your finances and how they influence the choices available to you, and how they fit in with your priorities and objectives.

My Wealth Compass Review is designed to help you make decisions about your future, understanding fully the options available to you and the financial implications for your future lifestyle.

This is vital for those considering changing their working life to reduce hours, retire early or leave corporate life in order to set up on your own.

When I work with clients in my Wealth Compass Review, we look at 7 key areas:

  1. Earned income
  2. Pension
  3. Property
  4. Spending
  5. Investments
  6. Priorities
  7. Mindset

Below, we look at each of these areas to allow you to start to consider your choices.

1. Earned income

If you’re thinking about retiring early or reducing your hours do bear in mind that you don’t have to go from full time working to full time retirement in one fell swoop. Often people prefer for it to be more gradual, for example, by reducing to 3 days a week to start with. In many ways this may be more appropriate since it allows you time to get used to the new lifestyle and find a new rhythm for the non-working days.

It may be that the work which feels ridiculously stressful over a 5 day period becomes so much more enjoyable if workload is reduced and you work a 3 day week instead.

Does your employer offer any form of sabbatical? This could be a wonderful opportunity for you to take a break from employment but still keep your option open to come back, if you decide after your sabbatical that is what feels right for you.

So, do think about what your ideal working pattern and non-working pattern will be, and which option feels most appropriate for you. Spend time planning how you will enjoy your extra time.

2. Pension

If you are aged over 55 and have pension savings available to you, this may allow you to start drawing against these savings now to provide the extra income you need when you reduce your earned income.

Accessing your pension can be done very flexibly. You may take a chunky amount in one year to pay for a wonderful holiday and then draw very little for the next few years.

Clients enjoy this flexibility and the ability to draw more funds in the earlier years when they are fitter and healthier to fund a lifestyle they may not want to continue in later years.

You do of course need to be aware that drawing against your pension early will naturally have an impact on how long your pension will last and how much you can draw in later years.

There are a number of options available as to how you can access your savings. Since pensions and the tax treatment of pension income is complicated do ensure you are fully informed of your choices and the implications. And take your time to make your decision, as it will impact your income for the rest of your life.

3. Property

If you have a larger home than you currently need, one option would be to downsize in order to free up equity. This is a particularly attractive option from now until 31st March 2021 due to the reduction in stamp duty. The amount you can release will depend on what size house you have now and what size you will downsize to.

Downsizing from a 3 bed house to a 2 bed house in the same location is unlikely to release very much equity, especially after you take into account the various fees associated with the house moving process.

However, moving from a large house in a large city with great transport links to a smaller house in a more remote location, may well allow reasonable funds to be released. You do need to be sure that this is right for you and you need to have confidence you are ready for this lifestyle change. Changing location involves considering more than just the money that will be released.

Make sure you are fully aware of how much additional capital you could generate, what you will do with this, and how much extra income this will bring in for you.

4. Spending

How much do you need to save for your retirement?

Sadly, there isn’t an easy answer to this question, since it’s one of those questions where the answer is “it depends”. It depends on exactly what lifestyle you want and at what age you want to start drawing against your savings.

If you are looking to retire at 55 and want to enjoy a very lavish lifestyle, you will need a very different amount to someone who wants to retire at 65 and lead a much more modest life.

Inflation will have an important impact on the spending figure. For example, if inflation is 2.5% per annum, today’s £100 a week grocery shop will cost £164 in 20 years’ time and £210 in 30 years’ time.

Start by looking at exactly what you spend now, and where you spend it. Are there any areas where you are willing to reduce spending if necessary? Do you even know what you’re spending your money on now? If not, start tracking it since you need this information to work out how much you’ll need in the future. There are many excellent apps available to help you do this. Or if you prefer, an excel spreadsheet or a notebook will do the job.

4. Investments

You may have other investments as well as pensions. If you’re mainly invested in Individual Savings Accounts (ISAs) you can draw this money without income tax or capital gains tax implications.

But other investments are likely to have tax issues associated with drawing against them, which will impact on the net income available to you when you draw.

If you are cautious about investing and have large sums invested in cash, be aware that cash is unlikely to keep pace with inflation.

Do you know how your investments are performing once fees and inflation have been taken into account? Do you know what income you could reasonably expect to draw from your investments in the long term?

If you have a mixture of pension, ISA, unit trust, bond, cash etc. you should seek professional help from an adviser to ensure you draw against your funds to make the best use of the various tax allowances available to you. Many of these allowances cannot be carried forward, so if you do not use them in the relevant tax years you may pay more tax than necessary, and therefore reduce the net amount available for your spending.

In my next article I will be focusing on the last two areas that are crucial for a successful financial future: priorities and mindset.

Want to know more?

I work with my clients in the Wealth Compass Review to support them to fully understand their options.

Together we consider your different scenarios and using specially designed software, we look at how likely your different options are to be successful and ensure your funds last. This is based on over 1,000 actual historical scenarios since 1900. We don’t guess what may happen in the future, we look at what would have happened in your scenario in the past. Therefore, it takes in all the erratic movement of the stock market, both up and down.

This gives you confidence in the choices you are taking.

To find out more, visit this link for a case study of Sally aged 52 who was keen to step back from her business, but didn’t know if she could afford to do so, and how I worked with her to help her understand what choices were available to her.