The price of crude oil has fallen around 40 per cent since a recent peak in June this year. This has a profound effect on economies and markets around the world as the cost of manufacturing and transporting goods falls along with oil producers’ income and the currencies of oil-rich countries.
The theory goes that consumer spending will rise because people have more disposable income; that inflation will fall as the price of goods eases; and that companies with high energy bills will become more profitable. If lower prices hold, the effect might become political and environmental as the balance of world power shifts from oil exporters to oil importers, and the impetus to develop cheaper clean energy wanes. Oil seeps so deep into the global economy you might think that to be a successful investor you need to have an accurate view on its price and its impact on asset prices. But you would be wrong.
No-one with an opinion about oil knows whether their view is right or wrong, and only the changing price will confirm which they are. Market prices are a fair reflection of the balance of opinion because they are created by many buyers and sellers agreeing on individual transactions. As an investor you can take a view of whether that balance – that price – is right but, like all other people with an opinion, you have no way of knowing whether you are right or wrong until the price moves.
Knowing this, it seems irrational to take a view (or a risk) on something so random as the direction of the oil price. In fact, why would one take a view on anything related to the changing price of oil; the US economy, for example; or the price of Shell; or Deutsche Post; or anything else?
The rational approach is to let capital markets run their course and to have a sufficiently diversified portfolio that allows you to relax in the knowledge that, over time, you will benefit from the wealth-generating power of your investments as a whole; without risking your wealth on a prediction that might go one way or the other.
Retirement Planning, in common with all financial planning is just a funding exercise. It deals with a fundamental fact of life that confronts all of us, namely that at some stage, whether you like it or not, you are going to have to stop working. When that happens your earnings will cease and you therefore need to build up a replacement income sufficient to maintain the standard of living to which you have (or would like to) become accustomed. It does not matter where the replacement income comes from but it needs to come from somewhere. One thing is for sure, it is not going to magically appear, so a plan is necessary.
The starting point is to work out how much you need to live off in retirement. This can be difficult because your circumstances can have changed quite a bit. That said begin by looking at your current expenditure. Apart from totting up all of your payments you should take note of what you are spending your money on. Some items should have stopped by the time you retire, at least in theory, such as mortgage and children’s education costs. However if you are on an expat contract and your rent is paid, you are going to need to start to pay full housing costs. So you add things on that you will need to spend and deduct items that will have stopped. Incidentally, when you carry out this analysis, look at what you are spending on utilities, insurance, and bank interest. If you shop around now, can you save some money?
Once you have worked out how much you need, the next thing is to calculate the level of income that you already expect. If you are entitled to the UK state pension you can obtain a forecast. The same should go for state pensions from other countries. You can also obtain projections for private pensions from the UK and other territories. You should also take into account the value of existing savings and investments as well as any rental income if you have investment properties. Do not include rent from the home you intend to return to, since this will stop when you move back into it. You may need to run some projections based on your current rate of saving and the present value of your investments and pension funds. Bear in mind that these need to take the effect of inflation into account.
Having determined what you need and how much is coming in, the final step is to work out the difference. This is what you need to fund. If you are going to build this up using regular savings, you need to convert it to a capital sum. In order to ensure that your target income is realistic, you should assume a similar rate to an index linked annuity in the UK and back calculate from there. You then need to calculate the regular monthly amounts that you need to save in order to arrive at the amount of capital needed to provide your target income. Simple!
Of course, all of the above is complicated by the fact that you are expatriates. You may not return to your country of origin. You need to consider the likely rate of inflation where you plan to retire and also the effect currency fluctuation on your savings. You also need to decide in which currency you wish to make the savings. Taxation is also an important consideration and you will need to plan for this well before you implement any transactions.
If this sounds daunting, it need not be. It is all in a day’s work for any competent financial planner with experience of dealing with expatriate personal finances. In addition to helping you with the basic funding calculations they will also be able to advise you on the best way to build up the necessary retirement income and hopefully help you to adopt a sound evidence based investment strategy, which gives you the best chance of achieving your goal for the level of risk that you wish to take.
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