One thing I’ve learnt through my twenties and now thirties is that how we imagine our future self is rarely how things actually turn out. There might be the odd person who knew they’d be a doctor from the age of 5 but the reality is, very few of us KNEW we’d be an accountant or a software engineer or social media manager. We are, by all accounts, pretty bad at predicting how things might end up.
This applies to our financial lives too. It’s not that we don’t know we should probably do something about our pension or finally get around to opening that ISA. It’s that somehow our future self feels so abstract and relatively unimportant in comparison to our present challenges (the cost of living crisis, soaring energy bills), that we never get around to the important stuff. In this article, I’ll be sharing some ways to care a little more for your future self.
This article is part of an educational series sponsored by Nutmeg.
I’m so excited to be working with Nutmeg - I’ve been a Nutmeg customer for nearly 10 years. I opened my very first Stocks and Shares ISA with them when I was at Uni and I still invest with them today.
Over the next two months, we’ll be unpacking pensions - we’ll be looking at the expectation-reality gap when it comes to retirement and exploring what you can be doing today to feel better about your financial future. This will include the 2022 edition of The Hot Girl Retirement Guide 👀 stay tuned…
Make sure you’re following along on Instagram for my educational series with Nutmeg and save November 9th when we’ll be doing a Pension Helpdesk on Instagram Live!
Who are Nutmeg?
Nutmeg is a digital investment management service. They offer things like Stocks and Shares ISAs, Lifetime ISAs and Pensions, as well as offering restricted financial planning and advice.. You can also transfer and consolidate your existing pension (s) into a Nutmeg pension.
If you’re a bit of a geek when it comes to numbers and research, you might find their latest pension report interesting.
If you just want to learn more about Nutmeg and perhaps consider consolidating some of your old pensions, then click this button.
1. Get to know your future self
One of the challenges we have to overcome in order to prioritise our future self is the fact that we don’t know them. They are a stranger to us. This means that when faced with the opportunity of having £100 today or £200 in 30 years, we often struggle to make the decision that our future self will thank us for. There’s some fascinating research in the field of behavioural science which demonstrates the power of connecting with our future self.
In an experiment, Hal Hershfield, Daniel Goldstein and a number of Stanford professors used software to create digitally altered photos of participants in which they looked much older. Half of the subjects were shown these images, the other half were not and then participants were asked to decide what they would do with $1,000. Their four options included buying something nice for someone special, investing in a retirement fund, planning a fun event, or putting money into a checking account. Amazingly, subjects shown the aged avatars put nearly twice as much money into the retirement fund as the other people. The act of engaging with your future self is one of the easiest tools we have to help us prioritise our future and it doesn’t have to mean using clever technology (or making a weird avatar).
Here are a few questions you can use to connect with your future self and start thinking about your financial future?
- Have you thought about what kind of retirement you would like?
- If you have a partner, have you spoken about retirement with them? What do you imagine your life will look like after 70?
- Speak to older family members about their retirement and pensions. What do they regret? What did they get right?
2. Make the most of the best account that ever existed
If talk of pensions A) sends you to sleep or B) gives you night terrors, you’re not alone. But please hear me out. Pensions are in need of a rebrand. Whilst they may possess the sex appeal and intrigue of a doorstop, pensions are brilliant things. They are probably the most misunderstood and underutilised tool for building wealth.
A pension in 3 lines.
A pension is a pot that you contribute a % of your pre-tax salary into. When you add to your pension, you rescue some of your income from the taxman 🦸♀️ Your employer pays into it too. You can then use that money to fund your retirement. In short, it's your contributions + free money!
So how much should you be contributing?
Firstly, let's just say a big hello to the elephant in the room here: achieving even a moderate retirement is going to be really difficult to do for so many. Living costs are at an all-time high and many have been forced to opt-out of their pension during the pandemic. But as a rule of thumb, experts suggest at least 12% of your income should be put towards retirement - some recommend as much as 15%. This includes employer contributions.
Another rule of thumb is to halve your age at which you start contributing and put that percent away every month. So if you start at 30, you need to put 15% away, but if you start at 22 you only need to put 11% away.
What about consolidating?
If you’ve been collecting pensions like Pokémon then consolidating can be a great option. By putting them all into one pot you’ve got less to keep track of and you might save money by paying fewer management fees. It’s important to double-check that combining doesn’t mean you’ll miss out on any benefits such as guaranteed annuity rates. If you think you might have a pension from an old employer but you’re not sure who it’s with, the government's pension tracing service can help - it’s free!
To learn more about making the most of your pension, click the banner below. Nutmeg has lots of resources and can help you open or transfer a pension.
3. Automate your financial life
What puts some people off getting their finances organised is that they think of personal finance as this whole area of their life that they have to proactively manage. And yes, there will always be some stuff to deal with and letters that need opening (please open your letters..). But if you’re doing money management well, you should be automating as much as possible. The best way to do this is by creating ‘rules’ for yourself. ‘Paying yourself first’ is one of those rules; this means automatically contributing a % of your salary as soon as you get paid. The beauty of automating is that you don’t have to think about it. Paying off debt, saving and investing, just happens. Here are some automation ideas you might find helpful:
- Setting up a standing order to save x% of your salary every month
- Using a money management app or your banking app to ‘round-up’ purchases and automatically set that money aside
- Using Direct Debits to pay your bills and to make your debt/credit card repayments
- Scheduling in a recurring calendar event to have a financial date with yourself or your other half
- Use IFTTT - If This Then That is a brilliant tool to automate your life and they can be used with a number of different banking apps. For example, you can round-up your purchases, save when it rains and pay yourself an allowance.
4. Understand compounding
If you have a pension, you’re an investor. This is a fact that may seem obvious to some but for most of us who received little to no financial education, it’s a fact that escapes us for most of our lives. It’s only as we near retirement that the ‘value’ of our pension starts to matter to us. The reason it’s so important to understand what being an investor means, is because it allows you to take advantage of what has been described by some as the 8th wonder of the world - compounding. Let me explain: In the first year of investing, you may make some money (returns) on your initial investment. In the second year, you invest the capital (your initial investment) plus the returns, and you make further returns on the total. And so on...your money snowballs.
For example, if you’d invested £5,000 in the FTSE All Share in 1986 – and withdrawn any returns – it would have grown to £28,357 at the end of 2016. If you’d let your investment benefit from compounding (by ‘re-investing’ the returns), you would have had £88,396 for the same period (1).
When you keep your money in your current account or a savings account with no interest, your money doesn’t grow. £10 today will be £10 tomorrow. Only, what does change is the purchasing power of your money. As prices go up (that’s inflation), what your £10 can buy you falls. So in essence, you lose money. The idea of investing is to grow your money (although of course, your capital is at risk which means you also stand a chance to lose money. But by investing over the long term, you maximise your chance of beating inflation, and some.
(1.) Compounding: 8th wonder of the world, FT Adviser – 1st February 2017
So there you have it, the top four things you can do for your financial future. Make sure you’re following along on Instagram for my educational series with Nutmeg and save the 9th November when we’ll be doing a Pension Helpdesk on Instagram live!
To learn more about making the most of your pension, click the link below. Nutmeg has lots of resources and can help you open or transfer a pension
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.
Join the party 🥳
✅ A monthly 💷 round-up straight to your inbox