Many new retirees find it a difficult transition in managing their money during their retirement years, this is brought about by the knowledge they will have reduced earnings or panicking about how long their capital will last them.
For the last few years we have developed a simplistic approach to this to enable us to explain to clients how they can manage their capital in a sensible and easy to follow format. We call this the ‘Pot 1 and Pot 2’ approach and it is as follows.
For my clients that are retired or working towards retirement we generally ask them to look at their capital with a view to two different objectives for their money. We call this the ‘two pots’ approach to investing and is an ideal solution to allow you to have cash readily available earning small amounts of interest whilst having other capital set aside that keeps pace with inflation and allows your money to work harder for you over the medium term. Investments for the medium term would obviously be invested within your personal attitudes to risk profiles.
Example of ‘Pot 1’ Savings – Short to Medium Term
This pot will give a slight amount of growth through interest rate additions but will lose to inflation. However, it does provide you with working capital to fulfil your objectives and needs, it could include the following:
- Your current accounts
- Cash ISA’s
- Building Society savings accounts
Example of ‘Pot 2’ Savings – Medium to Long Term
This contains the capital that can both give you greater long-term growth and provide you with a supplementary income if needed over the coming years. It is however still readily available and not tied up. The other objective of this fund is to eventually have it all in tax free environments such as equity ISA’s.
The purpose of this ‘pot’ is to gain growth over and above inflation and make your capital work harder for you to sustain your wealth through retirement. It will consist of the following: • The gains you make on your investment are tax efficient and are currently better than that from deposit accounts.
- Equity ISA’s
- Pension funds
- Open Ended Investment Companies (OEIC’s)
- Investment Accounts
- Investment Bonds (where needed)
- Structured Products
- National Savings
- Venture Capital Trusts (for higher risk investors)
- Enterprise Investment Schemes (for higher risk investors)
- Any other suitable investment that matches your risk profile, need or objective.
How much do I hold in each pot?
This is entirely your own personal preference and depends on many factors such as lifestyle, hobbies, spending needs, wealth and a whole other set of variables. Investments are built up around four elements called asset classes.
- Cash
- Fixed Interests
- Property
- Equities
These asset classes are listed in order of risk and it is worth mentioning at this point that risk should be proportionate to your risk profile. It is important that clients have a balanced structure to their portfolio’s. If you own your own home, then this is likely to be your biggest asset and it can be said for many that the property element is covered. Remember, diversification is the key to any successful portfolio.
We hope this gives retirees food for thought and assists them in simply separating their capital into two very different amounts, each with a different objective and each with a different goal. Pot 2 money is there to top up Pot 1 as and when it is needed. Having 2 or 3-years of spending capital in Pot 1 will allow you to leave investments held in Pot 2 to work for you.
The value of your investments can go down as well as up, so you could get back less than you invested.
A simple but effective approach to funding retirement. Click here to find out more.
