SPECIALS
The Old Fool's Retirement Guide

By Rob Davies
May 4, 2001

The latest Fool book is about to hit the shelves. It's the Old Fool's Retirement Guide, written by yours truly. It's all about how to invest for the retirement that you deserve as well as how to adapt your investment plan once you clock out for the last time.

Pensions are heavy going. We all know that, but this book takes a more light-hearted look at the topic and breaks the issues down into manageable bits. The first chunk identifies the fundamental problem that the vast majority of the population simply has not got much in the way of savings to live on in retirement. And they aren't putting very much into pensions either. What is worse is that the requirements of a pension are increasing because of rising life expectancy.

How Much Should You Save?

Clearly, we need to save, but how much exactly? First we need to estimate what it will cost us to live in our autumn years. Here the book provides some real-life examples of the cost of living, and space for you to make your own estimates. Using recent data the book reckons that £15,000, in today's money, is what you need to aim at for a reasonable retirement income. You won't live like a king, but you will be comfortable. Now, to get an income of that size demands a pretty big investment, but how big exactly? The second chapter of the book goes into this in considerable detail and, after much analysis, arrives at a figure of £300,000. That's a lot of money to have stashed away in a portfolio on the day you retire.

That begs the question of how on earth anyone can possibly hope to save that much. The answer, the book says, is in the stock market. Historically, the market that allows individuals to invest in the majority of British companies has grown at 12% a year in nominal terms. However, for the purposes of forecasting, the book assumes a long-term real growth rate of 5.5%. Using that figure it is possible to get the desired amount by saving £200 a month in the early years; quite demanding, but not out of reach for most people. The best way to make these investments is in a tracker fund that follows the progress of the stock market simply and quietly. It doesn't try and beat the market by employing expensive fund managers, so it is cheaper to run, and consequently has lower charges and better performance. As a result it is should beat three-quarters of other funds. If this low-cost investment approach is taken using a tax efficient ISA scheme then the resultant fund can grow tax-free. Naturally, the book explains how ISAs work.

Chapter 4 covers the basic mechanics and operation of the various types of pension schemes, and there are plenty. It is amazing how something as simple as saving can be made so complicated by government. And then comes Chapter 5 with its coverage of annuities. It does its level best to explain these things, which most pension purchasers only discover when it is too late. Although they have a number of drawbacks, pensions and annuities will be the most common method for people to fund their retirement.

Build Your Own Pension

But there is another way, and the book focuses on the idea that an individual can build up their own fund for retirement outside the conventional pension system with all its controls, and costs. In chapter 6 it explains how you go about using this fund to live on during that glorious period of life after work. The next chapter goes one stage further and tells you how you might be able to bring this period forward. The idea of early retirement appeals to many and this chapter tells you how to make it happen. But it is more likely that it will be a state of mind than a portfolio statement that will trigger the event.

Housing is an important component of our lives for all of us, and one that gets a chapter all to itself. In essence the key is to own your own home when you retire, and make sure you're not paying a mortgage when you get your bus pass.

There is a whole chapter devoted to how the Internet can help the pensioner. The silver surfer has an enormous amount to gain from the Internet. The ability to get shopping delivered to the home and keep in contact with people will be a huge benefit to this generation. As we might expect the last chapter deals with wills, inheritance tax and so. Tedious and gloomy stuff it maybe, but it needs to be covered and this chapter outlines the main imperatives.

This book sets out the financial implications of retirement, and they are onerous. But, having done that, it gives you a financial structure so that you can retire comfortably with adequate funding. It just takes a little planning, and an early start.

The book is out now. You can order your copy here.