There’s a moment in your late forties or fifties when life seems to become more complicated.
This should be a time when you enjoy the fruits of your earlier labours, with the career settled, children largely grown up and the mortgage mostly paid off.
On top of this, the current cohort stands to benefit from a record wave of inheritance — as future beneficiaries of baby boomer parents.
But it’s not so easy, is it? The economic turmoil of recent years has hit this age group hard, with many people now in financial distress, even if others are still doing well.
This group belongs to the Sandwich Generation, sitting awkwardly in the middle of the generational spectrum.
At one end, we are likely to have ageing parents who will need increasing support — emotional and physical as well as financial.
At the other extreme, our young adult children may have now left school, but they remain a financial pressure — they may need parental help during university and, once they join the workforce, have to find a place to live while grappling with full-time work and managing the emotional rollercoaster of youth.
Clients often come to us to discuss how they can best help at both ends of the spectrum. They are particularly focused on their children who face unprecedented rents, high mortgages, student loans and may have limited options beyond their parents’ support.
However, parents should not forget an important consideration — do they have enough to fund their own retirement? The question is especially salient when future investment returns are more uncertain than recent years, and inflation, while declining, is still high. Extending the sandwich analogy, how much filling can one afford to provide?
As regards planning for retirement there are key factors to think about: the average inflation rate during retirement, the expected future investment returns and our own longevity. All are largely outside our control.
Within our control are other critical aspects. First, ensuring we’re invested in a diversified portfolio with sufficient equity exposure to cover a long period of income drawdown. Next, making the most of tax-enhancing wrappers such as pensions and Isas (both using our annual allowances while we are earning or having excess cash and drawing down from them optimally).
Finally, checking we are not overpaying in fees (we find many clients pay by at least 1 percentage point more than they should on all-in fees every year for a directly comparable service).
Real examples help to show the impact. If a couple were to target a gross annual income of £50,000 to start in five years and last for the next 25, they would need around £1mn in their investment pot today, assuming average inflation of 3 per cent and annual investment returns of 4.7 per cent over the next 30 years.
If they are able to save 1 percentage point a year in all-in fees, their starting pot could reduce to £895,000. Alternatively, it could stretch an extra three years or they could increase their annual withdrawals to £56,000.
Knowing how much we need to support our retirement is central to understanding whether we can help other family members. No one wants to find they have given away too much and are left struggling.
Parents want to be generous to their children in their wills. But we find they are keen to understand what they can provide much sooner.
So let’s add three young adult children to the mix — all are working, one is married with kids and juggling childcare with full-time work, with two still single and struggling to get on to the property ladder.
Can you afford to bump up the filling from bog-standard cheese to a full-blown club sandwich?
For this example, let’s say we’d like to gift £75,000 per child. What is the impact of this generosity on the retirement pot? If we plan on to make the gift in five years — at the point of retirement — keeping all else equal in terms of projected investment returns and average inflation, the impact of a reduction in our pot of £225,000 will be to cut the gross annual income to £34,500, or £41,500 with a 1 per cent saving in annual all-in fees. (In both cases we will be depriving the tax authorities of inheritance tax on £225,000 if we live a further seven years after gifting).
There may also be elderly parents to think of — most of the help they need may be emotional or practical, such as cooking a meal, or doing basic home repairs rather than financial. But it’s worth remembering that the elements within one’s control apply equally to our parents’ nest eggs. Helping them to invest sensibly and keeping fees low can make a real difference to how long their pots last, potentially covering additional care costs. And if the pot is not exhausted, it will be additional wealth to pass on.
We need to tie down these financial uncertainties and clarify what we can do potentially to help family members earlier in their lives. My advice: face up to being the filling and get on with figuring out just what you can put in your sandwich.
Charlotte Ransom is chief executive of Netwealth