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  • Rosie Morley

The three biggest problems with retirement and what to do.

This month we feature a guest blog from Robert Wilcocks of Wilcocks & Wilcocks, a privately owned wealth advisory company who help entrepreneurs & families achieve financial freedom, security and fulfilment. Robert features in the book 'Retire Inspire' - If you are thinking about retirement this is a must-read.

A successful retirement doesn’t just mean avoiding financial poverty. It means looking back after 20, 30 or 40 years and not thinking, “I wish I’d done more of this or less of that.” In this post, we look at how to have a ‘no regrets’ retirement.


We’ll start with the three biggest problems retirement can bring:


1. Bad Plan, Wrong Plan, No Plan Syndrome – where failing to plan properly results in ‘BBQ’: Boredom and Bad decisions, leading to Quick death. [1]


2. The Principal Problem – where worrying about not losing a pension pot (the principal) distracts from the much bigger problem of inflation eroding it.


3. The Identity Vacuum – where a retiree’s personal identity is so entwined with their career, they don’t know how to fill their time in a meaningful way once work is over.


The choices you make at the start of retirement can lead to one or more of these problems, and have a lasting impact on the rest of your life. It’s like setting off on a journey and taking just one wrong turn – every turn after that takes you further from your destination. You need to think carefully about setting your retirement compass.


Defining your destination


To help you decide where your retirement’s going, right from the start, consider these three success factors:


1. Financial freedom – this means knowing your Big Number. How much money is enough for your dream life, forever? What will you spend, each week, each year, inflation-linked, over three or four decades?


2. Security – it’s one thing being financially free, but another to feel secure. When you’re on the beach, eating out, or simply relaxing in the garden, you want to enjoy your downtime in peace, without worrying about money, or feeling guilty about spending it.


3. Fulfilment – feeling happy at the beach is a fleeting joy; feeling fulfilled for many years is lasting peace. It’s about finding the right balance between vacation and vocation – not necessarily paid work, but any activity you find meaningful and enjoyable.


So, we have three potential problems and three ‘secrets of success’. Let’s bring them to life…


The story of the Boomer twins, Fred and Jack


Fred and Jack Boomer were born on 1st January 1948. Fred came first, and Jack followed around 20 minutes later. Having been best friends through childhood and school, they began their separate careers: Fred in marketing, and Jack in the gas industry.


By their mid-30s, Fred was managing multi-million-pound marketing budgets, and Jack was responsible for teams of 200 people. Eventually, they tired of corporate life and decided to combine their skills by developing a niche consultancy for the oil sector. Aged 40, they made the leap from well-paid, secure jobs to the insecurity of self-employment in pursuit of a dream. They knew starting a business would be tough, but they wanted to see their kids grow up. They wanted more freedom. More time. And to do things their way.


Fast-forward 20 years to 2008. Fred and Jack have built a well-respected business. They’re 60, and they feel the time is right to take a step back and let a younger team take the reins. They’re ready to retire.


They sell the business for £3 million, so have £1.5 million each in gross value. After paying tax on the sale, paying off their mortgages, and buying a few treats for themselves and their families, they’re left with about £900,000 each. Add to this £100,000 from personal pensions, and they’re each sitting on £1 million – plus around £5,000 a year from pension schemes from previous employers, and full state pensions, which will kick in when they’re 65.

Both Fred and Jack deserve a happy retirement. But unfortunately, only one of them is going to get it.

This is because of two doors.


At 60, they can choose which door to go through. Fred opts for the door on the left (we’ll come back to him later), but Jack turns the handle on door to the right. He hasn’t seen the sign, so he doesn’t realise the implications of the choice he’s making. He’s fallen foul of the first of those three problems: he doesn’t have a good plan. And he’s about to trip over the second.


He’s keenly – perhaps too keenly – aware that his £1 million in savings has taken a lifetime to build. It’s 2008 and equity markets have started to falter. He doesn’t want to risk his hard-earned money by investing it. And he doesn’t want to buy an annuity, because the income of around 2% – although inflation-linked – seems poor value. So he leaves it in cash, and waits.


And waits.


The stock market begins to fall badly. Lehman Brothers goes bust – a huge global bank with hundreds of years of history is gone.


The market tanks more, and keeps falling through most of 2009. In the UK, it falls almost 47% from peak to trough. [2]


Jack pats himself on the back.


In 2010, he thinks it might be a good time to invest. But just as he’s about to…

… the market bounces back.

And back some more.


And then some more.


Jack thinks it might fall back… then he’ll invest. But every time he starts to do something, he begins to second-guess.


In 2011, all the talk is of a recession and crisis in Europe. Jack is still in cash.


In 2013, the news is full of the US government’s debt crisis and a government shutdown. Jack is still in cash, receiving around 0.5% interest on his savings. He thinks, “I’ve missed the best opportunity I had to get in. I may as well wait again now.”


He’s lost out, because he’s been focusing too much on his £1 million principal and what could happen in the short term. He’s followed the wrong plan, thinking more about his money than his life.


This table shows the impact on Jack’s £1 million, when it generated 0.5% net return (and was duly spent), with 2.5% average annual inflation from 1st January 2008 to 31st December 2018.



He may have avoided the 2008-09 financial crisis, but – because he remained in cash and didn’t know when to get back in – he has £368,000 left by the age of 70. He’s unlikely to enjoy spending, because he’s not sure if he has enough for the long term. His retirement’s looking grim, unless he invests some of his money into growth assets or severely reduces his expenditure – or, by some miracle, cash picks up and solves his growth and income problem.


And now let’s turn to Fred. What’s he been doing all this time?


Unlike Jack, at the start of his retirement, he took the long-term view. He had a good plan.

So in 2008, he invested in a portfolio of shares and bonds. Of course, he didn't miss the financial crisis. He worried at some points, but he remained confident that things would pick up in time.

And, as this graph shows, they did.


Data source: Dimensional fund advisors returns 2.0. Risk warning: Past performance is no guarantee of future returns. The above is a simulation of a model based on index returns from the market, and does not include fund, advice or other costs and is used for illustrative purposes only.

The bottom line shows Fred taking 5% from his pot each year (so starting at £50,000 in year one) over ten years. You can see the credit crunch really take hold not long after Fred invested. You can also see the rebound.


The top line shows how Fred’s pot would have grown if he hadn’t needed to take 5% each year. If he’d had some other source of income – perhaps from consultancy work or starting another business – growth would have been even more impressive.


But even with his regular withdrawals, by the end of 2018, Fred still had a pot of £1.13 million. He’d taken 5% of the pot over ten years, which works out at more than £50,000 a year. Despite the credit crunch and worst financial crisis since the 1929 Great Depression, he’d been able to enjoy the first ten years of his retirement.


All because he chose the door on the right.


So what can we learn from the story of Fred and Jack?


Jack is an example of how the difficult part of investing – the risk – is often more about our beliefs, hopes and fears than what’s going on in the market.


The market is inherently volatile – but this volatility (often mistaken as risk) is what gives us long-term returns.


This doesn’t mean Jack should have invested completely in equities. There are long periods when equity markets as a whole can run pretty flat. But trusting in the long-term future of capitalism and investing in the great companies of the world has always worked, given time.


As Benjamin Graham, the ‘father of value investing’, said, “To be an investor you must be a believer in a better tomorrow.”


Fred and Jack both wanted a gross income of £50,000 a year from their portfolio. For that return, there’s a price to pay. Not just the investment fee, which is easy to identify and measure, but also the emotional cost – which for Jack was very high. Because he depleted his portfolio by keeping it in cash, he hasn’t been able to enjoy his retirement. He hasn’t enjoyed the things he spent his money on, and is stressed about running out. He’s paying the hidden cost of a life less lived, which you can’t put a price on. A life well lived is priceless.


And Jack still doesn’t know when or where to invest, and feels silly admitting this to Fred.

Fred too paid an emotional price for investing. Market growth hasn’t been consistent, and the immediate crash after retiring was very stressful. But by focusing on the long term, ignoring the news, and trusting in the future of capitalism, he was far happier with his decisions. Unlike Jack, he had a trusted adviser to act as a sounding board, providing the objectivity to help him develop a good plan and avoid being caught by The Principal Problem.


Most importantly, Fred has avoided the hidden costs that have affected Jack. He’s enjoyed the first decade of his retirement, and the outlook’s good for the rest of it.


Be like Fred, not Jack


Fred’s success is largely down to following some very simple advice:


● Plan better, so you can...

● Invest better, so you can...

● Live better


Careful planning is the only way to avoid The Principal Problem and The Identity Vacuum. You need to take the time and space to really think about your goals, objectives, fears and obstacles.

Try closing your eyes and imagining what’s going to fulfil you in retirement. Not just holidays, a car, a boat, or even spending time with loved ones. Think more specifically. What can you see yourself doing on a Monday morning that sets you up for the coming week? What will the average Tuesday afternoon look like? And the weekends – how will you make the most of them? [3]


Answering these questions will help form your life goals for the coming months and years. Be sure to look well ahead. Think about how your life might change as time passes – all the way through to 100, which isn’t so unusual these days.


Once you understand exactly where you want your retirement to go – every day of it – you can work out your Big Number. Then make investment decisions to achieve it. And get on with living.


[1] There are lots of studies on what constitutes a healthy retirement, and what doesn’t. This article highlights just some of them. The secret is to find a balance between vacation and vocational work, and remain curious and engaged about life. If not, the danger is capital can dwindle away, and if boredom sets in, it can trigger health problems, not least depression. Retirement is a huge transition that requires careful preparation.


[2] Source


[3] You can find more free exercises and tools to help you plan, invest and live out a happy, healthy and fulfilling retirement, at www.robertwilcocks.com