A few years ago, I was getting a lift home from work with a close friend, when I asked him:
‘Would you rather have £1M today or £50,000 per year for the rest of your life?’
Without a moment’s hesitation, my friend replied:
‘Yeah, definitely. I can make £50,000 per year investing it’.
I disagreed and, as I was no more than 25 at the time, I was probably correct. If I lived to be 80, that was 55 years of guaranteed income with no investment risk.
It did, however, make me think about the power of investment and the flexibility having a pot of cash provides versus a guaranteed income.
I was studying for my Financial Advice Diploma at the time but did not think about how fitting this conversation would become, considering my current role as a pension adviser.
If my friend and I were 55, approaching retirement, and were having the same conversation then I would tend to agree with my friend’s viewpoint. After all, with good investment management, I could achieve 5% growth every year. That would give me my £50,000 per year and I would still have £1M in my pot.
If I only made 3-4% every year and had to rely on £30-40,000 worth of income, I would still have £1M in my pot.
Let’s be even more conservative. Say I only make 1% investment growth each year. That would give me £10,000 worth of income and yes, you guessed it, I would still have £1M in my pot.
If I had other assets, then £10,000 might be all I need.
Maybe some years, I want to take £20,000 and other years I do not take anything at all.
The important thing is that I am in control. I make the decisions.
I could even leave it in cash, and it would last me 20 years drawing £50,000 per year , which would take me to 75 before the funds were exhausted. A good deal when you consider that if I died before 75, I could leave it to my family as a pot of cash. After all, the question I posed was:
‘£50,000 per year for the rest of your life…’
And so the moral of this story is that everyone’s circumstances are different; some people may require the certainty of a fixed amount of income, whereas others may require more flexibility. It is essential to seek advice from a professional adviser when considering big financial decisions. They can explain the different options available to you and recommend the best option, based on your own personal circumstances.
Forth Capital specialises in retirement planning, expat pensions and investments. To arrange an initial discussion with one of our advisers, please click HERE or call us on 00 41 22 311 1441
Jamie Tulip is an adviser at Forth Capital.