Getting your priorities in order

People do not have their priorities in order when focussing on retirement planning and are still not heeding the advice on the benefits of early saving, according to Fidelity International.

Fidelity International’s optimal retirement modelling has shown that successful retirement planning is based on the following factors; amount saved, when they start saving, asset allocation, investment funds and pension plans. However, when consumers were asked to rank these elements by degrees of influence on their ultimate retirement readiness they weren’t able to correctly identify the most influential factors.

Consumers incorrectly believe that ‘finding the best pension plan’ will have the biggest impact on their retirement pot and is the panacea to retirement planning. The amount saved over a lifetime was listed as the second most important factor, although people may be unaware to what extent. For instance, if a saver decided to increase provisions for retirement by 15% of salary would yield an extra 60% retirement income.

Critically the importance of saving early was relegated to a low priority and getting the right asset allocation was considered the least important factor in success.

Despite coming low on the priorities list asset allocation is actually likely to be one of the most influential variables in determining their pension pot. The research illustrates the significant impact to average retirement income if changes are made today. For example, a decision to increase the amount of equities in your retirement savings could increase your retirement replacement rate by as much as 90%. This is a sobering thought given the number of younger investors who, out of naivety or fear, keep large parts of their retirement savings in cash.

Peter Hicks, Head of IFA Channel at Fidelity International comments; “The overall conclusion of the modelling is that successful retirement planning is first and foremost a function of some down-to-earth decision making, especially early in life, about ‘saving something for later’. This, more than any other factor, reliably determines the lifestyle that will be affordable in retirement.

“We are saving too little, starting too late and then misjudging critical elements of planning and investment decision making. Furthermore, despite the heightened public debate about these issues, many people continue to view them as applying to everyone but themselves.”

Improvements in life expectancy mean that people will need to manage their investments for the long run, to draw down their savings at a sensible rate and to take action to insulate themselves from the effects of inflation.

Fidelity recognises that there is a group of investors who will want to look after their own retirement planning. However, many investors will benefit from independent advice throughout their retirement planning, particularly when tackling the complex field of pension transfers. Fidelity has therefore established a financial adviser referral process to compliment the direct business so that all parties needs are catered for.