The Four Levers That Will Guide You to Financial Success
If financial independence is your aim, there are four levers you can pull to get there quicker or more securely. If you are already retired and have no plans to work again, you only have two.
And the financial services industry is only really designed to help you with one of these.
A TYPICAL FINANCIAL JOURNEY
You earn money. You save and invest some of it (Lever 1 - MONEY IN) in the hope of getting a positive reward (Lever 2 - RETURN) so that in the future (Lever 3 - TIME) you will have a big enough nest egg to draw down on (Lever 4 - MONEY OUT) without your pot running dry.
You are the sole master of three of those. The financial services industry generally only markets solutions for one of them, your return.
WHAT THE FINANCIAL SERVICES INDUSTRY SELLS
Better investment returns, tax-efficiency, beating the market, glitzy financial products. “Come to us because we’ve got the magic formula”. Those are the stories we all want to hear and so it’s what the industry sells. It’s partly because they’re exciting and partly because the other three - work longer, spend less now, be prepared to spend less later - involve a more painful personal sacrifice.
HOW TO GIVE YOURSELF A BETTER CHANCE OF SUCCESS
But the danger with focusing too much on return is that not only is the future uncertain but also many sensible commentators are cautioning that future returns may be noticeably lower than those that investors have experienced since the 1950s.*
And if it’s true that we’re living in a lower return environment, you’re going to need to be more careful than ever that fees and other costs don’t eat into those returns any more than necessary.
But as returns will never be the whole solution, it pays to recognise opportunity in the others, to best prepare yourself for an uncertain future.
If you have the ability to, you can pay more into your portfolio. It means spending less now, which may not be possible if your finances are stretched. In addition, Present Day Bias makes it psychologically difficult to accept hardship today in exchange for a distant future benefit.
The longer you can afford to let compound interest work its magic, the more it will give you in return. Preparing yourself for some flexibility around your ideal retirement age can therefore be a useful strategy for dealing with an uncertain future.
The longer you expect to spend in retirement, the bigger the financial impact of your assumed retirement expenditure. If you can find a way to reduce your future expenditure expectations, you’ll immediately be much closer to that retirement goal.
It’s the easiest way to bring forward your planned retirement date!
UNGLAMOROUS, YET VITALLY IMPORTANT
None of those is easy but the earlier you are in your financial journey, the bigger the impact on your finances these last three strings will have.
It’s not the story that most of the industry wants to sell because it’s not glamorous. But it’s hugely important as your financial future is at stake.
To learn more about common-sense investing, click here.
*Credit Suisse Investment Returns Yearbook 2021.
The value of your investments can go down as well as up, so you could get back less
than you invested.
Tax and Estate planning is not regulated by the Financial Conduct Authority.