Apart from the home you live in, your retirement investment is probably the biggest lump of money you’ll ever be creating. And although it seems a dull as ditchwater subject – especially if your retirement date still appears to be on the distant horizon – it really is important. Even seemingly small differences now can make a big difference to your future. So it’s worth spending a bit of time getting the details right.
Be consistent
Part of the problem that a lot of UK company pension schemes are facing at the moment is that they took pension holidays when their funds were booming along with the stock market.
Whether you’re investing in stocks and shares or anything else, consistency is almost as important as choosing the right fund to invest in.
You’ll probably have been on the receiving end of what seems like a sales pitch about pound cost averaging: when shares are cheaper, your pound buys more of them than when they’re more expensive. So over time you’ll get an average of the price.
But unless you’ve set up a regular savings scheme the temptation is to wait until things improve or reduce your purchases when prices are low.
Consistency – almost robotic consistency – is far and away the best policy to help your retirement fund grow as much as possible.
Watch the costs
If you’re using stocks and shares for your retirement investment, chances are that you’ll be investing in a managed fund of some sort.
These funds have a variety of costs that – on the face of it – seem fairly small.
But because of the length of time you’ll be saving for your retirement, even a fraction of a percent can make a massive difference in the return you get.
You need to remember that all costs incurred by your pension fund are taken out of your final pension “pot” and that compound interest works on them. You can run a simple Excel spreadsheet to work out the difference between different charging rates.
If your financial advisor offers the option, it can also pay to offer them a fee and get their commission rebated back – ideally reinvested in your pension scheme.
Re-examine your plans regularly
It’s easy to set up a retirement investment plan and then not look at it again until you’re almost due for retirement.
The trouble with that approach is that things change. New options become available and – much the same as high interest savings accounts – old options get taken advantage of.
It’s sad but true that many firms take advantage of their most loyal customers by not giving them the rates that are used to entice new customers into the fold. If you don’t keep on top of this, your final retirement investment amount could be affected.
The performance of most funds – with the possible exception of trackers – can also vary over time as the fund managers retire or change firms. This can affect the performance of the fund and this isn’t always to your advantage.