3 costly assumptions many wealthy retirees make, and how your clients can avoid them

As your clients approach retirement, they’ll no doubt be thinking about how much they have and the kind of lifestyle they want to live.

However, at this stage it’s easy for wealthy retirees to make assumptions about these things without having actually run the numbers.

And, without doing so, it may put them in the position where they’re suddenly looking down the barrel of missing out on their retirement goals because they took certain things for granted.

Here are three of these mistakes, and how your clients can avoid them so they can have the kind of retirement they really want.

1. “The behaviour of the stock market won’t affect me”

The first assumption your clients may mistakenly make is that the stock market won’t have any bearing on their retirement.

On the contrary, the stock market could directly affect your clients and the kind of retirement they’re able to live.

Unless you have a crystal ball, it’s impossible to predict how markets will behave. This means that they need to have a plan for invested assets, such as pensions and investments, in the event that the market falls and reduces the value of their wealth.

How to avoid this assumption

To avoid stock market behaviour deciding how your clients are able to enjoy later life, they need to go into retirement with a plan for how they’ll fund their lifestyle in all eventualities.

If they intend to rely on pensions and investments, it’s vital that these are carefully diversified and balanced in the event of market volatility.

It may also be worth having separate cash savings set aside for them to live on while markets recover if their invested assets take a particularly large fall in value.

Perhaps most useful of all is to complete a cashflow model with a financial professional. This can allow your clients to visually grasp how their money will be affected in different scenarios, allowing them to make more informed choices with their money.

2. “Inflation doesn’t mean anything to me once I retire”

Inflation is in the news constantly right now, as the price of everyday objects and the cost of living soars. In fact, the most recent figures from the Office for National Statistics (ONS) recorded the Consumer Price Index (CPI) to have risen by 9% year-on-year in April.

It’s understandably easy for your clients to think this won’t affect them once they retire. But if anything, the impact inflation can have actually becomes more pointed once they finish work.

As the cost of living rises, the money they’ve diligently saved is at risk of losing value in real terms compared to the wider economy.

This can be dangerous in retirement, as this money needs to be able to support them for potentially as long as 30 or 40 years, while also allowing them to reach whatever retirement goals they have.

In fact, figures from investment platform AJ Bell and published in the Telegraph demonstrate how this could directly affect a pension pot.

Taking an individual with a pension pot of ÂŁ100,000 who requires an income of ÂŁ5,000 a year alongside their State Pension, their money would run out after 37 years, assuming no inflation and 4% growth on their fund.

However, a continued rate of 7% inflation would wipe 22 years off the pension’s life, seeing this individual’s pot exhausted after just 15 years.

Inflation is already at 9% in 2022 and, according to LBC, could reach 10% by the end of the year. As a result, your clients may face the danger of seeing their funds run out faster than they have planned for.

How to avoid this assumption

Fortunately, the remedies for retirees to reduce the eroding effects of inflation on their wealth are similar to the things they should also be thinking about now.

Your clients should keep an emergency fund of cash in retirement, ideally between one- and two-years’ worth of expenses. But it may be sensible to consider investing excess cash above this amount to give it more chance of outstripping rising inflation.

Whether that’s in their pension or in a separate investment account, your clients need to make the most of tax relief and investment returns to reduce the effect inflation can have.

They should also remember to use their State Pension efficiently. Provided that they have a full National Insurance (NI) record, the State Pension is a guaranteed sum they’ll receive that will typically rise in line with inflation.

So, by using their State Pension to exclusively pay for bills and expenses, your clients can then keep the remainder of their savings and investments for achieving their bigger retirement goals.

3. “I can live off my inheritance”

In many ways, this is the most tempting of the assumptions on this list, particularly if your clients believe they’re set to be beneficiaries of a large estate.

Unfortunately, there are many present dangers for clients relying on an inheritance for retirement instead of planning properly with the assets they have.

Firstly, no one knows when someone is going to die. And, as average life spans increase, waiting on an inheritance puts your clients in the rather macabre position of having to wait for a loved one to die before they can live the life they want.

On top of this, there are no guarantees that they’ll even receive an inheritance. For example, if a parent requires long-term care, they might be forced to live on the money they intended to pass down.

Even worse, your client’s loved one might even change their mind about passing on money at all. No one wants to think about a family in dispute over money, but it sadly does happen.

And, if there’s a prolonged argument about the division of someone’s wealth, it could leave your client unable to live the kind of retirement they want while they wait for an inheritance that might never come.

How to avoid this assumption

Fortunately, while this may be the easiest trap to fall into, it’s also the easiest to combat. Simply put, your clients need to understand that they mustn’t take their inheritance for granted.

Instead, they need to plan for retirement as if they won’t be receiving this money. That means saving and investing what they know they’ll have, and then treating any inheritance they do ultimately receive as a bonus to use however they’d like.

Again, cashflow modelling can be instrumental here, allowing your clients to see different scenarios for their wealth.

This would allow them to see how effectively their finances can support them with and without an inheritance, giving them the chance to make changes to ensure they can still do what they want in later life if the numbers don’t quite add up.

Work with an experienced financial planner

What your clients really need at this important life stage is to work with a financial expert who can help them plan for these different outcomes.

At Henwood Court, we have years of experience helping people to avoid these assumptions, designing financial plans that drive people towards their goals for the future, no matter what these may be.

If you’d like to start a professional relationship today, please do contact us.

Email info@henwoodcourt.co.uk or call 0121 313 1370 to find out how working with us can help your clients live the lives they want.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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