Retirement planning: how to fund your retirement holiday homePosted on
Retirement planning & investment advice – how to fund your retirement holiday home
I have met many people over the years, advising them on the dark arts and hidden secrets of the investment world and much of that advice is focused on retirement planning & investment for retirement.
Many of my conversations start with “what are your hopes, wants and aspirations?”. What this really means is: why are you saving and what is the most important event that you want to happen in your lifetime?
Retirement planning & investment advice
Quite often I meet investors who would like to live abroad in sunnier climates during their holidays or even live overseas throughout the damp cold UK autumn and winter months… but do not want to sell up or remortgage the family home.
This aspiration can be fraught with obstacles; such as current work commitments or the upheaval of a growing family.
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It also involves the outlay of a substantial amount of capital which investors may need to fund their lifestyles in retirement and later life. Many investors may therefore have a holiday home on their wish list but never get round to fulfilling the dream.
During our conversations, I hear “when I retire it would be lovely to buy a villa in Portugal, Spain or the Canary Islands’ and play golf 3 or 4 times a week.”
When I enquire what sort of property they are looking for… they generally come up with a specific apartment on a golf complex or apartment overlooking a harbour they like… but the conversation usually ends with “but I can never afford to buy one”. So in this article I am going to share a specific story on how we can make this happen.
How to fund your retirement holiday home
So in answer to the “but I could never afford to buy one”… I always ask why not?
The most common answer I hear is:
“I have spoken to my financial adviser and he said I would have to put extra money away, specifically to buy it, but at the moment we are struggling to put money away to invest for our retirement years, so it’s just not going to happen”.
And herein lies the problem. If we investigate the ‘dark arts and hidden secrets of the investment world’ we find in this scenario, the financial services industry is always looking to generate more assets under management.
We are bombarded with marketing material containing the messaging to buy this ISA or buy that ISA and save for a rainy day.
All nice marketing messages designed to attract investor’s money, so that the companies can hit their sales targets or generate additional fees from a new business sale.
It is all about targeting investors to get more money in, not necessarily finding a solution to help the investor who cannot currently save additional moneys.
If the client’s cash flow will not currently fund additional savings, the adviser walks away and the client continues to dream ‘if only’.
This is a ridiculous situation, but many financial advisers are restricted to what they can offer their clients or can only sell investment propositions that their company offers. Therefore finding bespoke solutions for their clients is not always a priority.
Case study: Michael’s retirement
Let us take the story of Michael. This client is 50 years old, runs his own business and is a keen golfer. He is looking at semi-retirement around 67, so in 17 years’ time. Michael has a Personal Pension and savings invested in an ISA portfolio worth in the region of £675,000 and getting around 6% per annum growth on his money; therefore feeling no changes are currently required.
Looking at the cash flow projections this would give him a fund value in the region of £1,286,000 at retirement age… so would offer an income in the region of £50,000 per annum. Michael also loves travelling the world playing golf, so needs a comfortable income.
However, he would dearly love an apartment on his favourite golf course in Tenerife, but does not want to spend his capital value on a property, because this would reduce his retirement income and I could see his point.
However, we only get one shot at life and I do not think we should leave this planet with ‘what if’ regrets.
So we had further discussions about what retirement would look like for Michael.
Michael and his wife enjoy the company of several groups of golfing friends and their ideal retirement would mean inviting friends over to Tenerife to enjoy the sunshine, share a few drinks and play golf.
So I asked him to show me what apartment he would like if he had the additional cash.
We checked the internet and found both apartments and villas available from £150,000 – £200,000 which is a large outlay of capital. Clearly Michael did not want to plan to take this amount of capital from his savings on retirement, so I suggested he could be a bit smarter with his money, and if his current financial adviser was not able to help perhaps I could.
One solution I hear from advisors in the financial press, is the client could consider taking more investment risk with their money to generate additional returns. But I do not buy into this approach whatsoever. There are other more sensible solutions available!
Michael’s financial adviser, who was a family friend, worked for a national restricted advice firm, which meant the adviser could only advise on that company’s chosen proposition. He could not offer independent advice or go outside the company’s remit.
This meant that Michael was being disadvantaged and shoehorned into products that the wealth manager offered and was not being offered the best financial solution.
When I reviewed the portfolio, the average fees being taken out of the funds each year was 2.05%. Clearly Michael was comfortable with the performance and the service, but when we ran the cash flow forecasts, he had not realised the impact these fees were having on his long term wealth. Why would he? His adviser was not going to tell him he could be financially better off going elsewhere for advice!
I suggested a more transparent and financially efficient approach to investment which had lower investment charges, but still had the same expected returns of 6% for the same investment risk profile. The total industry charges, including my fees, were 0.95% per annum.
As lower fees were being taken from the client’s funds each year, this meant more wealth was left in the portfolio to compound.
This little change meant that the projected fund value at age 67 would be in the region of £1,550,000 and not the current projection of £1,286,000. By saving over £160,000 in financial service industry charges over this period, Michael’s money compounded, giving an additional projection of £265,000 in his retirement fund.
That’s a nice villa and a very nice apartment on Michael’s favourite golf course and it’s not cost him a penny extra!
If you would like to consider how you could generate extra money from your portfolio and make your dream come true, let’s have a conversation.