Remember that day when you were 16 years old and you told your friends: “I will be millionaire and retired before I’m 40”. Do you remember that? Ok, maybe it was just me then, but I’m sure you can also relate to this story.
I’m a financial advisor and I want to share with you what I’ve learned throughout my professional life to date and give you the top 5 reasons why most people – even successful professionals in high-pay, high-pressure jobs in financial centres like Hong Kong – are still not rich in their forties, despite yearly incomes of USD 250,000+.
Whether you’re in your forties or fifties, if you are not financially secure or at least know where you are on that path, you have probably not done one of the following things.
But don’t worry – it is never too late to start. You can start any of these right now.
1. You don’t have a personal financial plan.
At work you probably wouldn’t dream of proceeding without a plan: be it for your current deal or the yearly budget, right? But when you look back at your career so far, have you applied that same rigorous business mind-set to your personal finances?
As a test, can you answer the following questions about the past quantitatively and precisely?
- How much have you saved each year of your working life so far, and how does that compare to plan?
- How much have your investments yielded each year, and how does that compare to your forecasts?
And, although the future is uncertain, do you have rough estimates of:
- How you expect your income and savings to evolve from now until retirement?
- At what age you will retire, and what your net worth will be then?
If you can’t answer some of these questions, you don’t have a financial plan. That’s serious. Just think what would happen in the corporate world with an executive who failed to meet objectives, couldn’t explain exactly how results compared to plan and couldn’t provide a plan for moving forward.
But fortunately here you are only accountable to yourself. It’s easy to get started and it’s never too late. Read our 7-page comprehensive guide on Personal Financial Planning and our guide on Retirement Planning to learn what the process entails. If you have children, you could also benefit from our article on Planning for Education Expenses.
2. You’ve saved after spending, rather than spending after saving.
One of the key outputs of a personal financial plan is knowing how much of your income you need to save and invest to meet your financial goals. Knowing that figure allows you to put saving right at the beginning of your monthly budget – together with rent / mortgage, rather than as an afterthought – after meals and drinks out, clothes, holidays on beautiful beaches and so on.
Twenty or thirty years into a professional career, it is almost certain that you could have put together adequate savings for your age. Of course, rent in major financial centres is expensive, and if you work overseas you need to go home to visit family and friends.
But as an exercise, do the maths: if you had downsized and rented a more modest home, how much would you have saved through the years? And what if you had cut out that extra trip to a beach resort? And dined in rather than at those trendy restaurants? How much would those savings have added up to now, had they been properly invested for 10, 20 or 30 years? And what would you prefer, that moment of luxury or this extra amount towards your retirement and financial security?
Once again, it is never too late to start. You probably have a higher income now than you did back then, which gives you an excellent opportunity to save. If you are working abroad, make the most of this time when you pay lower tax rates of 15% in Hong Kong vs. 45% in the UK.
Make things easier for yourself and avoid temptation by saving monthly (see our comprehensive guide on “Understanding Monthly Investing Opportunities”) and invest as much as you can of bonuses, inheritances and other one-time income – see our guide on “Understanding Lump-sum Investment Opportunities”.
3. You didn’t put your money to work for you as hard as possible.
What have you been investing in during these years? What were your returns how does that compare to benchmarks?
If you can’t answer those questions, or if you had the habit of leaving large portions of your net worth in savings-accounts, checking-accounts or default, conservative, investments offered to you by your bank or pension fund, you probably haven’t maximised your investment returns.
Unlike when many of us began our professional careers, global interest rates are now at all-time lows and many are in fact negative. Because of that, leaving your savings in government bonds or bank accounts is probably not enough to meet your retirement objectives – you need to look to other asset classes and investment options.
Investment Property is one option that might be right for you, as we discuss in our comprehensive guide “Investment Property: secure your investment and maximise your return”, as well as in articles on Property in Hong Kong, Property in Key European Markets, Mistakes First Time Buyers Make, and How to Boost Your Property Returns. Property investment doesn’t necessarily require large lump-sum investments, as we’ve discussed in “Can you invest in property with US$50,000?”
The right asset classes at a given time for your personal portfolio can vary, and specific investments are best discussed with a financial advisor.
4. You’ve been working for your bank and the taxman.
Where are you tax-resident and domiciled and what taxes and tax rates apply to your work and investment income? What is the optimal tax-wrapper for your investments given your current conditions? What fees do your pension and investment providers charge, and is that reasonable considering the services they provide?
If you can’t answer some of these questions, there is a good chance you could legally pay less tax, and it is almost certain that you could find better investment alternatives.
We have put together easy-to-understand guides on how the most important UK taxes – Income Tax, Capital-Gains Tax (CGT) and Inheritance Tax (IHT) – work.
How your investments are taxed can vary dramatically depending how they are structured, so it is important to ensure that they are in the right ‘tax-wrapper’ for your personal situation. For overseas professionals, QROPS – Qualifying Recognised Overseas Pension Schemes, can be useful. UK tax residents, on the other hand, can benefit from reading our guide on Self-Invested Personal Pensions – SIPPs.
Some of the tax benefits you could make use of are annual, which means that if you missed out you cannot go back and change things. Fortunately, though, many of them involve life-time values or apply at the time of retirement or of withdrawals, and so it is most certainly not too late to optimise your tax affairs.
Finally, making sure your investment returns are as high as possible and taxes and fees are as low as possible is usually easiest if your savings are consolidated in one place. If you have worked for several employers, you probably have multiple pensions. See our articles on Consolidating Your Pension Pots.
5. You’ve suffered financial setbacks.
Enough self-flagellation. Maybe you aren’t quite where you’d like to be because you suffered a major financial setback – made a lousy investment, divorce, lost your job, had to care for ill or ageing loved ones, and so on.
You obviously can’t change the past, and of course some risks can’t be avoided. But there is a lot you can do to prevent future setbacks for yourself and for loved ones. For medical and life issues, see our comprehensive guides on Medical Insurance, Critical Illness Insurance and Life Insurance.
In summary, if, despite a professional career, you are now over 40 and not where you’d like to be financially, it is likely that you have made a few errors in your personal financial planning. That’s the bad news. The good news is that getting back on track isn’t difficult or painful. Especially if your income is higher than it was when you were younger, it will be easier to make up for past shortfalls. But starting now, you must ensure you put together a financial plan, save diligently, maximise your investment returns, minimise your taxes and fees and protect yourself from financial setbacks.