All this week, Morningstar is supporting Financial Planning Week, the Institute of Financial Planning's national initiative to promote successful financial planning. Day three’s focus is on young families.
The IFP’s Financial Planning Week survey, compiled by YouGov in association with NS&I, throws up some worrying statistics. Almost a third (27%) of 35-44 year-olds surveyed said they are not currently putting any more aside and of those who are saving, just 19% are doing so with retirement in mind. The most popular reason for saving amongst this age bracket is for a contingency—a reassuring figure given a family’s careful financial planning, saving and budgeting can be destroyed in one fell swoop should an unexpected disaster occur.
“Numerous studies have pointed to a massive protection gap in the UK and young families are the most at risk from the effects of a disaster,” Alan Dick, Certified Financial Planner with Forty Two Wealth Management LLP says. “Therefore, it is essential that young families accurately quantify their protection needs and find room in their budget to provide suitable insurances.” Dick also warns, however, over wasting precious potential savings on overprotecting: “It is just as important, though, to avoid over insuring as the extra premiums could be put to good use saving towards long term goals.”
Unfortunately, it is often the occurrence of a sudden incident that jolts a family into assessing its finances and seeking professional advice, such as redundancy or the incapacity of the main breadwinner. No one wants to talk about the ‘unmentionable’ but, as Benjamin Franklin famously said: “The only things in life that are certain are death and taxes.” Planning for death, therefore, should be relatively easy since it is such a certainty.
Read this article for useful tips on how to financially prepare yourself and your family for both the inevitable and the unpredictable.
Planning for an event that isn’t a certainty is clearly much more tricky but no less important. The chance of redundancy, for example, is something that has no doubt crossed most people’s minds over the past year or so and though the UK economy is widely predicted to return to growth in 2010, employment lags an economic recovery and unemployment is still set to rise in the immediate future.
Conventional financial-planning wisdom has long held that you should keep three to six months' worth of living expenses in highly liquid accounts, in case you should suddenly need to access your funds, though the current financial crisis illustrates that figure is probably too low. (Wouldn't you like to have more than three months to find a new job if you lost yours?) For more on creating a job-loss safety net, read this article.
Francis Klonowski, Certified Financial Planner with Klonowski & Co, says there is a tendency for people to put off the ‘sorting out,’ particularly when it comes to preparing for the unexpected, either out of apathy and through the fear of discovering something they don’t want to hear. Yet once they sit down with a financial planner and go through their the numbers, clients are often surprised at how close they are to their goals. “But too often they don’t know what their objectives are, and the beauty of financial planning is helping to establish at an early stage just what those might be,” Klonowski says. “For instance, how can you be “better off dead than alive” if you don’t know what your family would need to live on?”
Preparing for the unexpected is just one aspect of successful financial planning, preparing for the certainties such as the imminent pitter-patter of tiny feet or the more distant retirement are also paramount. “Whilst this age bracket is likely to require financial products to assist them in achieving their goals, such as tax-efficient savings, pensions and life cover, a general organisation of finances can have significant benefits without the need for investment know-how,” says Keri Carter, Certified Financial Planner with Broadway Financial Planning Ltd. “In fact, a recent survey conducted by the Daily Mail revealed that spending an hour a week on organising an average family's finances, could save up to £1500 a year."
With 27% of 24-35 year-olds (the highest proportion of all age groups surveyed) saying their household financial situation has improved over the past six months, much of which is likely connected reduced mortgage costs, this could be the perfect time to take a fresh look at the family’s finances, particularly as so few of the next age bracket are yet to start saving for retirement.
“It is extremely worrying that only 19% of 35-44 year olds are making any provision for their retirement,” Alan Dick says, noting that the UK average life expectancy continues to rise and governments are struggling to support the existing aging population. “There can be little doubt that the burden of providing for retirement will need to shift even further towards the individual in future,” Dick adds, “In recent years there has been an alarming trend for people to see their houses as their pension pots but the recent slump in the property market should have served as a wake up call.”
How much one needs in retirement can be a tricky question to answer—the financial services industry has long claimed that an 80% replacement rate of pre-retirement income should be the goal to ensure a successful retirement but each individual’s wants, needs and financial situation are different and many retire perfectly happily on considerably less. Read this article for more on the "80% myth."
Fortunately, Dick says, saving for financial goals is simply a matter of understanding and balancing the four funding variables:
1. Cost—how much will the financial goal cost in future (don't forget to allow for the effects of inflation)?
2. Contribution—how much do you have to invest today and in future?
3. Time—when do you want to achieve the goal by?
4. Investment returns—what level of growth is viable given the level of risk you are prepared to take?
“In many cases it can be a delicate balancing act but it isn't nuclear physics,” Dick says. “A good Certified Financial Planner should be able to help young families work out the costs of their various objectives and also prioritise the competing goals.”
Another interesting statistic to emerge from the national survey is that of all the age groups questioned, 35-44 year-olds are the least confident in investing in either UK or global equities. This is perhaps not so surprising, Certified Financial Planner Dennis Hall of Yellowtail Financial Planning Ltd says as those who make up this age group were either coming into the job scene at the start of the tech boom, or perhaps working their way up the food chain when the whole thing imploded. “They may well have lost a lot of money, both real and virtual, and since then it’s been a lost decade for equities,” Hall notes. The generation before them may well have lived through the last recession and also witnessed one of the longest bull runs in history, while the decade behind them are yet to consider savings seriously.
Those included in the ‘young families’ bracket will also be experiencing a squeeze as new responsibilities take up a bigger slice of their disposable income, Hall says: “Longer term savings are not even in the frame as they seek to save for shorter term security, emergency funds, or maintaining lifestyle, such as holidays and other discretionary spending.”
Hall says: “Equities are a good long term investment, but a decade of lost growth is what we have experienced, and many will probably feel more secure in cash, and who can blame them?”
This video featuring Morningstar’s Director of Personal Finance offers tips for those wanting to get back into the stock market (a full transcript is provided), while this article provides useful guidance on managing your portfolio and your finances
The IFP’s Financial Planning Week survey was compiled by YouGov in association with NS&I. All survey figures, unless otherwise stated, are from YouGov. Total sample size was 1,896 adults. Fieldwork was undertaken between 29 June-2 July 2009. The survey was carried out online. The figures are unweighted. Regional breakdowns and variations are available upon request.
