Contrary to popular perceptions, planning for your financial future is not an impossible task for anyone. But there are persistent myths that first need to be dispelled. If you have no real financial plans for your future, are you really "planning to fail"?
Whenever I meet someone who needs to commit to creating a solid financial future, I usually encounter one of two responses to my advice that now is the right time to start. The first is that they will never retire. The second is that they are glad I raised the issue and they need help to start on the right path.
To the first response I realise that the person is hiding from the stark reality that he is way behind in his planning. I hear all sorts of excuses which people ultimately justify to themselves about this.
The second response is much easier to deal with; this person recognises the need and the urgency and is keen to implement a strategy and structure plans to reach targets.
If you have read thus far you are likely a number two. But no matter where you stand there are some myths and misconceptions which may be leading you astray.
MY PROPERTY IS MY FINANCIAL FUTURE
This really is a myth because property is not everything. Many people have made great returns on property but capital appreciation can only be realised once you sell a property. Feeling you have made sufficient gains to create enough wealth to retire on is often incorrect because inflation takes over, eroding any gain you realised when you cashed out.
Property also has a mysterious way of not selling at the value you feel it should, and sometimes not selling at the exact time you want it to. This lack of liquidity means you are unable to draw down a part of the capital value of any single property without incurring debt.
For those relying on rental income, property is a good idea as one of the asset classes you can use. Rental rate escalation gives some protection against inflation. But do not rely entirely on this single asset class because then you have all your eggs in one basket and if the rental market declines or even collapses you will be in trouble. Not only will it be difficult to generate the revenue you need from rentals, but also you might not be able to sell a property to realise capital.
MY EMPLOYER PENSION WILL BE ADEQUATE
Unfortunately this is rarely true. If you have had the same job and moved up the career ladder with the same employer for your entire working life, the chances are that you will be in a stronger position, with a pension adequate to fund part of your financial future.
However, pensions are generally designed to generate half the final salary you were enjoying just before you retired, if you have been in a scheme for 40 years.
Many schemes will create an aggregate sum toward a secure financial future but will usually be insufficient.
When I profile clients I usually find that the amount they feel they need to retire on has no relation to the amount they have been earning in their job. We must also assume that the company scheme you belong to will not collapse or have to reduce benefits payable to retirees.
Contributions paid into a corporate scheme are often accumulated into your personal retirement fund. Sometimes, through the poor investment decisions of others, schemes have not created good returns and the amount you are left with at retirement is totally inadequate.
INVESTING IS TOO RISKY
This is often a cop-out for people who know they need to do something about accumulating investments but feel insecure about doing so. Corporate pension schemes invest in markets and stocks typically form a substantial part of those investments. So, as an individual, you may be nervous about investing in the stock market when in fact you are blindly invested in equities anyway.
If you find the right investment adviser he will be able to show you ways of investing while taking account of your risk appetite. You will be surprised at the options available without very much exposure to equities. Such holdings are also able to generate returns far greater than you will find in any bank and they will be exposed to much lower risks.
I HAVE LEFT IT TOO LATE
It is never too late to start making arrangements toward your own personal financial independence. If you are driving a car when suddenly a brick wall appears and you have no chance of stopping, do you not bother hitting the brakes? If you are on the way to a meeting and traffic makes you late, do you simply not bother to turn up? In both these cases, your reactions and your instincts tell you to do your best and try to stop that car or arrive at the meeting late. It is never too late.
In the same way, it is never too late to start making preparations toward your retirement and you will certainly not regret this. I have met some individuals who say they have retired on too much money; it is usually the exact opposite for the majority.
They were late in starting and thought they had no chance of "getting there" but have managed to secure a comfortable retirement for themselves because of a forward-thinking plan that ultimately changed their lives.
Quite often people can defer their retirement and gradually slow down by working part-time. They will sometimes seek help from a financial professional who shows them how to uncover possible pensions they actually thought had been lost or cancelled. In the Western world there is no such thing as a cancelled pension. Investors are frequently surprised at how savings can grow without taking unnecessary risks. These smaller aspects collectively assist them to pool together a larger picture that works.
I WON'T LIVE LONG ANYWAY
This is almost as bad as "I will never retire." Medical science is constantly improving, extending lives. Look around you and you will see the reality that people are healthier and live longer.
If you plan to expire in your eighties and you happen to run out of reserves at that time, you really need to plan again.
I CANNOT AFFORD SUFFICIENT SAVINGS
This is also a common myth, similar to the attitude of those who feel it is too late. Starting small and at least accumulating assets toward ultimate financial independence is a really great idea. If you started saving, say, US$150 (4,700 baht) per month for your newborn child and increased the amount by 5% per year, growing at 6% it would be worth around $90,000 when your little one turned 18 years old. That would be a pretty good start for anyone at that age.
Ignore all of the myths and get moving on a plan today. Seek the right help and you will be nicely surprised.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.