We must all become a lot smarter with our money. The reason: an enormous shift in financial responsibility is underway! What was once ‘their’ responsibility is now your responsibility! And by this I mean the responsibility of ensuring that each and every one of us has sufficient money to live a comfortable life in our post-employment years.
For the benefit of anybody that doesn’t know, we are all being told we will live longer. And, by living longer, this means more time in retirement than our parents or grandparents.
We are also being warned by study groups to expect less from the State and from our employers when it comes to financial supports in retirement. For a start, the State has been revising upwards the qualifying retirement age to claim the State pension. Employers too are making enormous changes, especially to pension arrangements where the switch from Defined Benefit to Defined Contribution is accelerating faster than Gordon Gekko could offload his worthless shares in the epic ‘80’s movie ‘Wall Street’.
There are enormous personal challenges too! We are being told we will be fatter in the future, much fatter! In fact, it is projected that children in Ireland today are on track to be among Europe’s fattest in a matter of decades. If this turns out to be true, then Irish society will have to grapple with a range of associated illnesses, including type 2 diabetes, high blood pressure, high cholesterol, heart disease and a higher risk of cancer. Aside from quality of life issues, medicines for such illnesses cost a lot of money and the challenge here is who will pay?
Risk of medical extortion
In a recent example of medical extortion, a US based company, Turing Pharmaceuticals announced a 5,000% rise in the cost the drug Daraprim from US$13.50 a pill to $750. For some patients, their medical insurance didn’t cover the cost or in other cases, only covered a percentage of the drug cost. Affected patients were left with the stark choice of going without the drug or making enormous personal sacrifices to pay for it. Most had little choice but to choose the latter!
If you don’t have private health insurance, the chances are you will be left to fend for yourself as the State is unlikely to have the financial resources to cover all the associated costs! And by fending for yourself, I include the very real likelihood that you will have to endure a ‘godot’ episode as you wait to be seen by a medical expert.
A longer life means more financial resources to pay your way and if you suffer poor health, the financial costs could be crippling.
So, let’s take a look at what a typical thirty-something should be considering if they are to plan effectively for their future financial well-being.
- Protect your health! Health matters! For those in the overweight or obese camp today, the chance that their future financial burden will be high is high! So, on this point, either lose the weight or increase the financial resources to cover the future costs.
- Buy a home. And not just any home. Buy a home that costs less than you can afford. In other words, don’t put all the money you earn into buying that trophy home. Leave some extra cash for the other essentials.
- Establish an emergency fund – at least 12 months expenses should be covered and more if you can achieve it (yes, I know how difficult it can be but do you really want to rely on moneylenders, credit card companies and borrowings to cover essential costs if things get tight. Or worse, do you really want to drop critical insurance / protection cover???).
- Pay into a pension – I know, I know, pensions are for old people. But, here is the real trick. If you are in your late twenties or early thirties, TIME is your greatest asset. So, the more you can put away into a pension now, the more opportunities you will have in your forties and fifties to do other stuff. Remember, the State gives you back a lot of your own tax (called tax relief) to put money away AND, in many cases, your employer will also give you extra cash to put into YOUR pension account. This really is a smart way to save. Oh, and one other point, pension management fees, watch them! By reducing fees paid to your pension fund manager, your pension fund can grow at a faster rate! On this point, look for ‘passive’ investing opportunities! For that thirty-something year old, the benefit could be worth hundreds of thousands of extra euro in their account instead of someone else’s.
- Protect! Protect! Protect! Protect your family with a suitable protection policy against death and serious illness. In the case of the life protection policy, it only pays out on the death of the policyholder whereas the serious illness policy pays out on the diagnosis of the covered illness. The point here is to protect the survivors. Of course, if you are single with no dependents, the need for protection cover is questionable. But in the case that you do have family and dependents, you must have protection cover to make sure their financial loss is minimised.
- Make a Will. You would be amazed at the number of people that don’t. Remember, if you die without a Will (make sure it is properly witnessed), it is the legal profession that will end up taking a lot of your wealth!
Frank Conway is founder of MoneyWhizz.org, the financial literacy initiative.