Many people have to supplement their income in some way when they retire. You may well have a lump sum which you have either saved or which you got when your pension plan matured. This chapter looks at supplementing your income by savings and investments. If you have no lump sum large enough to invest, you may be able to realise some of the value locked up in your home, and we also look in this chapter at equity release schemes.

General Principles Of Saving And Investing

What do you want to do?

If you aim for nothing, you will probably hit it. Many people feel they would like to save or invest, but it remains a vague feeling. They may succeed in putting aside some money in a savings account of some sort, but it goes no further. They have no purpose or aim in their saving. The savings they have may be a nice little nest egg, but if it has no direct purpose, it can too easily get used up on the first emergency, or even the first whim, that comes along.

Make it your first task to sit down and think about your aims. This will help you to structure your savings and investments. For example, if you want to save for your retirement, you will want to put your savings somewhere you cannot touch them until your retirement date. Otherwise, you might be tempted to use the money for something else, and find yourself short when you come to retire.

Here are some of the most common aims for saving:

• Generating an income.
• Protecting your capital.
• Combating inflation.
• Providing for your retirement.
• Passing on your wealth to the next generation.
• Putting a deposit on a house.
• Paying for education of your children or grandchildren.
• Having the holiday of a lifetime.
• Buying an expensive item such as a boat.
• Replacing a car.

In this chapter, we are thinking mainly about generating an income for your retirement, but you should also be aware of the possible other uses for savings. You may well want to use savings for a holiday, or to replace the car. Then there are also the occasions when some urgent repair may need to be done on the house. It is always wise to bear in mind the effect of inflation, so try to obtain from your savings an income that has at least the possibility of escalating year by year, particularly if you have no other income.

At all times, be aware of your changing circumstances, and plan your savings with them in mind. Changes usually happen slowly, and we do not always recognise them. Therefore, take time every so often – say every five years – to review where your life is and where it is going. Then make any changes necessary to your saving habits.

Keep It Flexible

Unless you are endowed with powers of second sight, you do not know what the future holds. One in three marriages end in divorce, and a divorce can seriously upset the best planned savings and investment strategy. Divorce may be the most obvious wild card in the pack, but there are so many other things which can cause your plans to go awry – ill health, for example.

It is always a good idea to try to make your savings as flexible as possible. Ask questions about any investment you undertake, such as:

• Can I unscramble it if necessary?
• Is it readily realisable?
• Is the value liable to fall as well as rise?
• Can I pass it on easily to my descendants?

Evaluating the risk/reward relationship

When making your plans for savings and investments, you must decide about the degree of risk you are happy with. This does not mean that your degree of risk is set in concrete. You may change your attitude to risk at different times of your life, or depending on how much money you have to invest. Remember one of the first principles – review your circumstances regularly (and this includes a changing attitude to risk) and be ready to change your plans if necessary.