Balance is key in our plans for life after work

It is the time of year when a review of savings is an absolute must. Like it or not, all of us have to think about putting aside resources that can fund life after work.

Allocating a small amount of time to that function each year can have dramatic consequences for your options later on.

I know the following comments are clinically cold for anyone in negative equity or out of work, but shying away from the issue is head-in-the-sand thinking.

If you are employed and have a defined benefit pension scheme then it should mean a percentage of your final salary will be paid once you retire.

If that’s the case, then just ask your HR manager two simple questions.

* What percentage of my final salary is likely together with any other end-of-work payments? 

* Is the pension fund that pays that sum properly financed? 

Satisfactory answers to both these questions should end the conversation. If the answers are not good, then read on.

Increasingly, employees and the self-employed have to construct their own saving schemes to provide a pot of cash for later on.  This can be done through recognised pension arrangements that give tax breaks or  with a simple investment process.

Here are the parameters I use.

* Investments must beat inflation every year; 

* There must be some diversification in any assets owned; 

* Consistently adding to savings is important; 

* My appetite for risk is limited.

Using these  guidelines, think about your savings strategy as a portfolio. It should, ideally, contain a bit of property, cash, fixed income assets, equities, and  exposure to commodities.

The property bit is likely to be your home. Market value minus mortgage is a rough asset measure.  Forget about it as a trading asset and instead aim for a debt- free house when retired. At that point it could be seen as an option for cash release.

Cash is much denigrated currently as interest rates and Dirt almost eliminate any return. Even with inflation at low-single digit percentages cash does not keep up. It is, though, a store of value that is readily accessible and relatively safe in nominal terms so you should always budget for some. Bonds have similar attributes but I lean towards high-quality ones which also offer low returns.

Commodities should be kept  as a small piece of any plan. Gold is dug up from one hole and buried in another for safety so I’m not sure how much of a productive asset it really is although as an inflation hedge it’s handy.

Equities are important element to creating a nest egg but approach these conservatively too. This year the Iseq has returned 28% but the critical test annually should be around beating inflation. If inflation is say 3% then anything above that is keeping you ahead of the game in real terms. Finding companies with dividend yields greater than inflation and ones that have a record of growing and being well covered by profits should be central to any hunt. Capital gains are added juice.

Balance, caution, and commitment are the key words when looking out for your future financial needs and that applies no matter what level of income or work you derive from life.

  Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.


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