We are often approached by new clients who have accumulated substantial amounts of money over their lifetimes and are about to make the single biggest, scariest financial decision of their lives. It also involves the largest sum of money they will ever have to move. They are about to retire and turn their capital sum in to an income. In that first meeting, we are often asked for our current market outlook.
Our answer is always “Our market outlook, well we must have one I suppose, and it must be around here somewhere. I confess, I don’t pay much attention to market opinions-ours or anyone else’s -because it’s essentially irrelevant to do what we do. But you’re certainly entitled to know what our outlook is and I will go and find it. Before I do that though, may I ask you a question of my own, that I think may be even more important?
As you sit here today, looking out at the balance of your lives – of both of your lives – are you highly confident that your income will always be enough to sustain your lifestyle? Or have you become concerned that at some point during your retirement you might actually start to run out of money?”
Any discussions about market and economic outlooks can therefore be deferred until this huge issue has been addressed.
Financially speaking, retirement is an income problem. You would think this would be intuitive, but a lot of people we deal with start off thinking it’s a capital problem. You don’t ask on any given day, “Do I have enough capital to fill up the car, do the weekly shop or go out to dinner?”
The fundamental challenge to income throughout retirement, which on average is 30 years, is erosion of purchasing power. In simple terms this means that every year, everything you need to buy will cost more. At a 3% annual increase in consumer prices, it’s going to take £2.45 in the 30th year of retirement to buy exactly what £1.00 buys today.
Therefore, the only rational goal of a retirement portfolio is to produce an income that rises through the years at more or less the rate that your cost of living. Only that way can your income keep pace with your expenses. And only that way can you expect to continue to purchase dignity and independence in retirement.
In part two, we will talk about how this can be achieved.