3 ways to secure your financial future - planner George Agan
The big picture
George is a financial advisor and friend of the podcast.
If you have questions about how to manage your money, we can introduce so to George you can get personal help from him - you can find more info here.
He says we're seeing massive generational differences - the way people under 50 years old will (or can) build wealth is very different to their parents.
It’s obviously increasingly difficult to get on the housing ladder and we don’t imagine a world where house prices increase at the rate they have in the last 40 years for the next 40.
Younger generations have more freedom and opportunity but less security - older generations had jobs for life.
Defined benefit pension schemes have largely disappeared for this generation of workers.
We have auto-enrollment workplace pension schemes today which have been a great success, but they will only take us so far - they won’t deliver the financial returns a lot of us need for the the kind of retirement we want.
It always blows our minds how much money we’ll need to retire with the same lifestyle we’re living today.
George explained a great rule of thumb I hadn’t heard before - the rule of 375.
Take your monthly gross income today, say £3k/month, and then multiply it by 375, which is £1,125,000. That's quite a lot of sheets. And it's what you'd need if you want to retire and live the life you are today (if you're earning £3k/month).
These are big, scary numbers, but they’re big because they mean you don’t need to work again (in theory!)
The 375 rules supposedly accounts for inflation and tax. And it allows for a sensible withdrawal rate (so you don’t reduce your pension pot too quickly and run out of money) although George didn’t go into what that rate might be because it of course depends on your circumstances.
George mentioned the 4% rule (withdrawing 4%/year from your assets for you retirement) which he thinks is a good guideline but a bad rule.
We’re also living longer than ever before.
Take all of this together, and it’s resulted in massive changes in how people in the UK need to plan for their retirements.
You used to be able to rely on the state and your company to pay for your retirement - if you managed to live that long. Now it’s really up to you, the individual.
Basically, you have to make some good decisions throughout your life if you want a good retirement. Saving enough, contributing to your pension, making decent pension fund choices, using your stocks and shares ISA effectively etc. More on how to do that later.But it’s not all about planning for your retirement, asys George. It’s important to live for today but not at the expense of tomorrow. You need to get the balance right of enjoying your life rather than abstaining until you retire.
Plan your finances through 4 quadrants
Financial planning can be complicated but think about your financial life in 4 quadrants, or squares - earn, spend, own and owe. These squares dictate your financial life.
The earning quadrant will disappear at some point (when you stop working). At this point what you own needs to pay for what you spend, so you can afford to not work.
This is where your assets come in. You need to own enough stuff - investments, cash, property etc. to pay for what you spend.
George loves investing in global equities (as does Damo) - George describes it as a wonder class.
It’s also important to figure out how you can leverage your tax position because the average household will pay over £1.2m in their lifetime in direct and indirect taxes which is mind-blowing. The question is, how can we use tax system to our advantage? That’s often worth speaking to a financial advisor about to be honest.
If you want a good retirement you need a good pension pot. The good news is pensions are very tax efficient. If you’re a higher rate tax payer, every £1 you earn goes down to 58p after tax. Instead you can use your pension to contribute whole £1s, and then compound that untaxed amount over 30 years into quite a lot more. Specifically, if you get a 5% real return over 30 years (which is what global equities have delivered historically), every £1 you contribute to your pension will increase £6.30.
Put another way, this means you can choose to get 58p today or £6.30 in 30 years.
Check out this episode with Lisa Conway-Hughes if you’d like to learn how to get more from your pension.
It’s tough to make those sacrifices today but you are buying financial freedom. You are buying your time in the future so you can do what you want rather than have to work.
Compounding takes a long time - George says it takes 14 years to double your money, with a 5% real return. So you need to be in this game for decades.
Remember increasing contributions (to your pension or ISAs) are the most valuable thing you can do in the earlier years, not trying to get an extra 1% or so in performance. This is why increasing your income is to important…
How to increase your income
If you see yourself as an asset, your ability to earn is the most valuable thing on the table.
Check out this episode on getting a pay rise.
Think about investing in training or other things that can increase your income.
If you don’t have money to invest in yourself, then perhaps you can invest your time in increasing your income. Damo’s YouTube channel cost £100 to get started. Of course he then had to put a monumental amount of time into making it work - but that’s his point - view your time as an asset.
In different seasons of life you will be able to flex different assets to build wealth - time, money etc.
If you have a partner or children then consider getting life insurance or income protection. Check this episode if you’d like to learn more about when and how to get it.
Different ways to build wealth
You can be frugal, cutting on costs. But George doesn’t suggest cutting costs too much because it compromises on your life. You can only cut so far, it’s more about building income/assets after a certain point.
You can create good habits through automation, setting up payments like paying yourself first (saving), automating bills etc.
It's vital to stick with your current lifestyle when you get a payrise (rather than spending more) - and putting away a good chunk of your new excess earnings.
Of course it really helps if you can get better returns with your investments too - e.g. aiming for a 5% real return (after inflation). If you get 5% rather than 3% you’ll end up with nearly double the money.
Most people aren’t checking what their money is doing for them, especially pensions. Check out your pension. Is it in a lifestyle fund, which basically means is it de-risked by including stuff like bonds? Lots of pension funds expose their customers to less risk early on to stop them from leaving but the general guidance is that younger people, at least under 45 years old, should be invested in 100% global equities through their pensions. This is because they can't touch their pension money for over a decade (it's locked up until people are 55, soon to be 57, at the time of writing) - and stocks have always been the best performing asset class in the long term, so if you're not doing that, you're missing out on vital pension growth.
George doesn’t think investing in individual stocks is generally the way to go. Go for index funds instead (which is Damo’s view) because finding good individual shares is needle in a haystack territory.
He says the biggest mistake people make with tax is leaving tax relief on the table. He suggests using tax wrappers like pensions and ISAs. Sign up to our 6-part newsletter series on how to build wealth here to learn more about this.
When planning retirement, if you think you need more money, consider being more flexible on how you work (e.g. reducing to a few days a week rather than retiring) or working longer, e.g. earning a few years more.
Sometimes if you work a year longer, you’ll get five more years of money for retirement.
Downsizing can release capital, but a lot of people think they’ll downsize and then don’t (or don’t until way longer than they originally think).
Statistically, in a couple, one person will get to 90 years old.
Don’t rely on inheritance, says George.
It’s all about combining different approaches and assets. There’s no one single thing that will do it - at different points focus on growing your income, or your assets, or reducing your spending etc. You want to give yourself the most levers in later life.
You can get help from George here.
