Making Cents; Ignorance isn’t bliss, it’s oblivion for Kildare retirees

I WAS contacted by a lady about a month ago because retirement for her wasn’t a million miles away and she wanted to see if there was anything she needed to be doing to ready herself for that eventuality.

She’s 58 and thinking about retirement only came about because the company she works for is one of those who are making thousands redundant worldwide and she happens to be one of the hundreds who are being impacted in Ireland.

Anyway, in advance of our meeting, she decided to check in on her pension fund so she could tell me its value.
And when she did, she got some shock.

Because over the past year, it had dropped in value by circa €158,000.

This loss meant that her personal contributions over the past four years, which she had maxed out by the way, counted for nothing. They were effectively wiped out by the amount her fund went down in value by.
And it gets even worse.

Because the amount she held in shares had also reduced in value by €154,000.

She’s worked with the same company for about 20 years and everything she has is tied to it i.e. her pension and all of her savings which happened to be in shares.

And over time she concentrated all of her savings into buying company stock because she believed in the company. She had no reason not to, and she was also buying them at a discount and was being offered shares by way of a bonus, so over 20 odd years they had accumulated into a large amount.

And in fairness, she’s done really well with those shares because the amount they’ve increased by, is far greater than the amount she’s lost in the past year. It’s just bad timing that this drop occurred given that she’s being made redundant and is coming close to, or as she sees it, nearly being forced into retirement.

I’ll come back to her shares in a moment but let me deal with her pension first.

The first thing I noticed about it was how high the risk was for the two funds she was invested in.

She had an 85% exposure to shares and in my opinion this was way over what would be considered an acceptable amount and was completely inappropriate for someone of her age. The way her pension was structured was fine for someone in their mid-20’s but not someone in their mid to late 50’s.

Personally, I would have had her at about 42% and had this been the case, she wouldn’t have lost €158,000, it would have been more like €53,000 which is still significant but €105,000 less than what actually happened.

And it’s easy to look back and say she should and could have done things differently, but any decent financial adviser or even a recently qualified one, would have thought the same as me, especially given her age.

It appeared to me that she took her eye off the ball when it came to her pension fund, and I’m not sure there was ever an eye on it, from anyone.

It seemed to me that she had this everything will be alright attitude and sure there was nothing she could do i.e. the market is the market, but there was a lot she could have done to mitigate these losses, she just didn’t know what they were.

And in fairness she was getting zero help or advice from the administrators of her company scheme. It was a case of, here’s the funds available, pick your own and she did. She just didn’t know what she was doing and didn’t know the potential loss to capital if things didn’t go according to plan.

She didn’t have a Plan B.

But then again, she didn’t have a Plan A either.

And if she had her time back, would she have done things differently? It’s easy to say she would have but who knows. And it doesn’t matter what she would have done, you can’t go back in time and unfortunately she’s found out the hard way what ignoring your pension feels like, especially when markets go down and you don’t have much time to make up for those losses.
Some people will find it hard to feel sorry for her, because she had an awful lot and much more than most people but the amount she lost isn’t the point, because it’s all relative. What could be huge for some could be small for others and vice versa, the point is she took little interest in her pension and it cost her and cost her big.

The lessons I think anyone should take from this story are threefold.

Take notice of how your pension fund is structured, it’s more than important. As you get older, you should gradually adjust what % is invested in the various asset classes so you take on less risk and protect what you have. The women I told you about did neither.

The good news is that most pension companies and group occupational schemes offer default type funds that adjust your investments for you as you get older i.e. they do the de-risking for you. She didn’t choose this option and she wouldn’t have had to if she had an adviser looking at what she was invested in, but she didn’t.

If she did, they would have told her that her investment risk tolerance should begin to change to focus less on growth (equities), and more on protection (balanced and fixed income assets, bonds). The key message she should have received was, you want to make money when markets are up and you want to lose less when they are down.

My second takeaway is to start mapping out what your retirement will look like. I’d say a good 10 years before you decide to stop working.

You should check in with your dream team at least twice a year, every year. And this is a term that’s used in the states, where they are referring to that group of professionals who are helping you grow and protect your wealth and your pension fund.

And your dream team could be your own personal financial adviser and if you don’t have one, someone connected to your employer’s pension administration team. You want to connect with them to make sure you’re on track and if any adjustments need to be made now in advance of retirement.

WATCH: Taoiseach welcomes €630m investment at Limerick facility

The third takeaway is not to become over dependent or exposed to any one stock.

You should diversify and spread your risk especially if the majority of your net worth is concentrated on one stock. That doesn’t mean you don’t retain a good chunk of them, just don’t let them be everything.

Had this woman sold some shares and invested them in a fund that invests in say 50 different companies in five different sectors, she’d still have lost money last year, but she’d have lost €97,600 less than being exposed to just one.

Eggs... basket... you know the saying.

And I’d say don’t wait to sell your company shares in one big go either, just because an external event you have no control over forces you to. You should be diluting them every year and yes it may be a hard thing to do especially if the share price is doing well and you don’t want to lose out on these gains. But don’t look back if the share price tanks, and you end up losing a ton of money, and think what was I doing?

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie