How can I plan financially for my future if I’m not entirely sure what I want in the future? How can I think about the decades ahead when I don’t even know what I’ll be doing next year? This year more than many has shown that it can be hard to have a clear sense of where you’ll be in X, Y or Z years’ time when this can be influenced by so many factors outside of your control?
And as DIY investors, you may have similar thoughts when deciding how to invest your own money. Because the fundamental starting point for us – your ‘goals’ – may not seem so straightforward to you. Life can be complicated after all.
Maybe you want to buy a house one day, say, and have a family. If so, you’re going to need a house deposit. But how will you get there? What might happen to house prices in the interim? What will happen to your career and salary? Will it take you to a cheaper part of the country or allow you to save more? How much help might you get from your parents? Will you get an unexpected windfall or suffer an unexpected setback along the way? How easy will it be to get a mortgage? Will it be a joint mortgage backed by two salaries? What will interest rates do? For some, this may paralyse them into inactivity.
GREATER CLARITY OVER TIME
All these factors and more, including how well your investments do in-between, will determine how quickly you reach your targets. But then a little uncertainty is usually baked into most of our life goals. The important thing is to get into the habit of investing regularly with a specific purpose in mind because, in my experience, it’ll invariably put you in a stronger position to get you where you want to be.
It’s never too early to invest, however little you’re able to put away. In fact, the earlier you start the better, because it all builds up and the more time you have, the greater the power of compounding.
The table below illustrates that by showing what it would take to build a retirement fund of £500,000, depending on the age you start saving. If we assume an average annual investment return of 5% after costs, a 25 year old could get there in 40 years by saving £336 per month. A 35 year old with 30 years to retirement, though, would have to put away £610 per month, while a 45 year old would have to save around £1,225 per month over 20 years.
WHO WANTS TO BE A HALF-MILLIONAIRE?
| Period to retirement | Monthly saving |
| 40 years | £336 |
| 30 years | £610 |
| 20 years | £1,225 |
Source: Vanguard calculations. Notes: Table shows hypothetical pathways to a £500,000 pension pot assuming a hypothetical 5% annual investment return after costs.
Whether, in reality, you retire at 60, 65 or 70 doesn’t matter. What matters is that the 25 year old who started earlier will have greater freedom to choose. As such, putting off your savings might not only prove expensive to you in the long run, it could also have important lifestyle consequences. And this works with other goals as well, including saving for a house deposit.
What matters is to start saving because you can always fine-tune things later. Having a plan in place will help in this respect by showing also show up discrepancies, so you can adjust and make up any shortfalls if your plan is thrown off course.
Crucially, the further away your goal, the more you can tolerate taking on risk with your investments – which is why our second investment principle is about making sure you have the right balance in your investment portfolio. But you do get greater clarity over time, which can help to concentrate the mind and optimise your decision-making.
PENSION CHECKLIST
After all, how will your retirement investments perform? Maybe they do better than expected; maybe they do worse. When you check in on your pension in your 40s, for example, does it seem to you that you’re on track to retire at the age you’d like to and with the kind of projected income you’d want? If not, you may need to consider topping up your contributions, if you can – or plan, instead, to retire a little later and leave your money invested for longer. After all, one consequence of the pandemic is that working from home has become more feasible, so going freelance or part-time is now potentially within reach for more people. Being retired also doesn’t mean you can’t be part of the gig economy!
There are other questions too that might need to consider along the way. What about your partner’s finances? Are you making the most of their unused tax allowances? And what about your health and the financial security of your adult children – might you need to make provisions?
The list of potential unknowns that we all might have to consider over our investment lifetimes is as broad as it is long. We’ve already seen this year how plans can suddenly be upended, with the effects of the pandemic squeezing the incomes and job security of many people, but also creating opportunities for others who’ve been able to save more as a result of working from home.
However, thinking about your future goals and planning your finances around these goals at least gives you some control – it helps to anchor your planning and guides you when your circumstances change and you need to adjust.
