The financial crisis saw many people focus on debt reduction and management, with savings and investments taking a back seat. With the recovery now well established and the economy reaching full employment, financial planning has once again moved to the top of many personal agendas.
"Most of us start financial planning without even realising it – planning how to save for our first car, managing our weekly budget or planning for our wedding," says Mercer Financial Services chief executive Trevor Booth. "Budgeting is the foundation for any financial plan, along with clear financial objectives setting out short, medium and long-term goals. Once you have defined your goals you can then set out the steps needed to achieve them. Having a plan with small bite-size steps is really important in helping to deal with personal financial issues. A good starting point for creating your budget is the Competition and Consumer Protection website – ccpc.ie."
A good lifetime financial plan should be quite simple, according to Colm Power, financial planning manager with Davy. "It should do four things," he advises. "It begins with identifying our short, medium and long-term goals. Most of us don't think about these goals and they need to be teased out. The next part of the plan is quantifying what each goal will cost. After that, prioritise the goals into the must-haves, nice-to-haves, and like-to-haves. And finally, you set out the action plan to achieve the goals."
He also advises people to build separate investment plans around the different goals in accordance with the life stage they correspond with. “Cash savings are usually best for car and holiday savings, low risk investment or savings plans for wedding and college plans, and people can afford to take a higher level of risk for longer term goals like pension. But you will need to make some sacrifices and trade-offs along the way and you may not achieve all your goals. It is important to take financial advice when making a plan to help make informed decisions.”
Making a plan is one thing, sticking to it in the face of competing calls on our cash is quite another, says Investec's Brian Kingston. "Young people in general are more interested in spending than saving," he notes. "They don't think about things like insurance – maybe car insurance, but that's about it. But as you go through life you need life assurance, you need health insurance. Then you might have children and you've got to pay for their education. In my experience people are always catching up because of all the competing needs for their income."
He believes it's got even harder now despite the recovery. "The housing situation in Ireland makes it even more difficult," he points out. "Saving for a home while paying rent at the same time makes it very hard to put money aside for anything else. Health insurance premiums have been rocketing at the same time and creche costs going through the roof. How do you prioritise what you spend your money on in those circumstances? One thing for sure is that not everything you earn should be spent the month you earn it."
That’s easier said than done though. “Of course, you’re not going to start a pension when you’re 18. Most people start in their 30s or 40s and they are always playing catch-up. Retirement planning will go to bottom of the list because most people live for the now. They ask what they need to do this month and they don’t review their finances enough.”
Colm Power agrees. “The thing that stands out for me is that we all set targets like New Year’s resolutions. But even short-term targets are hard to stick to. How do you stick to them in the long term?” He advises people to put their financial goals on paper. “Studies show that people are more willing to stick to targets and plans when they write them down. You can do it yourself or sit down with financial advisers to do it.”
State Street Global Advisors Ireland (SSGA) managing director Ann Prendergast believes that employers and the State have to step in to help. "People tend to think more in terms of short-term goals when they think about financial planning," she notes. "Only 40 per cent of private sector employees have a pension scheme. That leaves a huge proportion of the population relying on the State pension."
This needs to be addressed through greater involvement on the part of employers and government, she argues. “There are four components to a pension plan. The day you start; the day you retire; the amount you contribute; and how much you invest in it. Three of these decisions can be taken away from the individual if you have the proper system in place. If you have a company scheme in place you shouldn’t rely on employees to join. Employees should be auto-enrolled where possible. The contribution amount should be pre-determined unless the employee decides to vary it in some way. They should be allowed to opt out but this should be discouraged. The investment decision should also be made for them. Most company schemes have a default fund and we find that most people opt for that default fund. It is incumbent on employers to have a good well thought out default fund. If you take these three decisions away from people it allows much more discretion around when you retire.”
It also looks after one of the competing needs while allowing people focus on the others. “Makes it easier for people to look after their short-term needs without taking the easy option of putting their long-term needs on the back burner,” Prendergast points out.
She believes there is a pressing need to tackle this issue. “The last survey of Irish pension savers we did in 2016 showed that only 22 per cent of them were confident that they would have enough to provide for their retirement. I’m not sure it would even be that high if we drilled down further into it. As a society, we have to make it easier for people to provide for their retirement. And our research shows that people do want somebody else to make it easier for them – 80 per cent would be happy to be auto-enrolled in a pension scheme.”
Regular review of the lifetime plan is also critically important, according to Catriona Coady, tax and financial planning adviser with Goodbody. "It's very important to have a written plan and log of all your savings investments and insurances like your pension, life assurance and income continuance policies. When you have it all in one place you can see it at a glance. That's very important when it comes to reviewing the plan to make sure it is meeting your needs. We often hear about people forgetting about pension they had from a previous workplace, for example. Also, if people have suspended contributions to their pension or savings plan during the downturn they might want to start them up again now. It's just as important to keep an eye on the plan when things are going well as it is during a downturn."