All the Money, All the Time, All at Once – tradeoffs and decisions on the road to financial freedom.

Have you ever thought to yourself – if I received a £1million windfall what would I do? (Depending on your circumstances, you may need to adapt this to £10million or £100million to make it a worthwhile thought experiment. This little game may not apply if you are one of the world’s 2,668 billionaires).

It’s an interesting distraction that allows you to fantasise about some of your wildest financial freedom dreams:

About buying things, 

having the best holidays and adventures, 

looking after your family, 

helping your friends and favorite charities, 

starting a new business or passion project,

or just doing whatever you please.

Receiving a large lump sum of money is, in most cases, an opportunity. 

With ‘The Age of the Final Salary Pension’ ending, soon most people will reach a point when, having saved diligently over a working lifetime, they have a lump sum perhaps, in a pension, an ISA or a combination of the two. Particularly with pensions, which cannot be accessed until a certain age (currently age 55 but this is increasing,) it means you can find yourself having access to a lot of your money, all at once. Perhaps your business makes up a large part of your retirement funding plan and on exit you are confronted with the fruits of your lifetime’s work in a capital sum.

Rather than feeling like an opportunity, it can often feel terrifying. What are you going to do with all this money?! 

A common concern is that from retirement onwards there will be no further pay slips, no automated monthly bank credit.  This is it. If your savings fund halves in value and never recovers, there is little opportunity to keep working and replenish the pot. Also, there was security in knowing that a pay slip was coming each month. Your lifestyle could be easily managed in discrete little packets.

Another thought experiment then – what would happen if I approached my manager and said – “I would like all my salaries for the next 30 years up front”. This is a thought experiment so let’s put aside my manager’s likely immediate answer of “no.” Let’s imagine this is a different universe and my manager, being an enterprising and creative person agrees. 

We sit down and work out a number and then a few days later there it is – all my salaries all at once. I now owe the company my time for the next 30 years and the money is mine to figure out what to do with. Is that terrifying – yes. There will be no more pay slips. If I spend the money in one go then I could be in serious trouble. I can’t just get another job – if I leave, I owe the company the money back for ending the agreement early. I’m also not going to receive monthly packets of money in measured amounts whereby I only ever need to deal with a small amount at a time. There is a certain comfort in knowing that if I keep working, there will be more pay slips. But having all my salaries is also a huge opportunity. I no longer have to drip feed my life.

My saving for later life can start in earnest,

Big holidays don’t need to be saved for,

My need for an expensive mortgage is greatly diminished,

A pot for school fees can be segregated.

I’m in control of my monthly payments. If I need more some months, I can have it. If I need less, I don’t need to keep religiously taking the same amount.

I should have a more successful money life for having received my working income upfront and being able to benefit from growth for a third of a lifetime on a large sum. You could likely also have a more successful retirement for having access to all your savings at the beginning of the retirement time period.

A £1million pot of savings – whether a retirement pot or my super salary pot – does need managing so that it doesn’t run out before say a 30-year period is up. However, there is a simple economic reason that having a lump sum of money to control offers more opportunity:

Money received now is worth more than the same amount received in future.

My 30 years of pay slips is similar to a typical retirement timeframe for example age 65 to age 95. The main difference is that my mega-salary is a pipe dream. Retirement with a £1million savings pot could be reality for many people. Having a lump sum of money at the beginning of a 30-year period could be more valuable than having that money drip-fed to you over 30 years (say with a final salary pension or annuity). That drip-fed money may have inflationary guarantees built in but invested sensibly and you have the chance, a high probability even, of exceeding inflation – not just matching it.

Many people see the benefit of doing more with their early retirement years. These are the adventures years, the time when you should have the most energy and are in good health. As time goes on you may want to do less and will naturally spend less. Having your retirement pay slips all at once gives you the flexibility to front load your lifestyle – spend more in your early retirement years than your later years. This is the opposite of what happens with a final salary pension or annuity – you will probably receive more in the later years than the early years. 

There is a conflict between wanting complete financial freedom and having the security of a pay slip or  guaranteed pension.

Financial freedom is the ability to spend our days doing mostly whatever we would like. But we would also like that freedom to be guaranteed. 

Perhaps we are a little bit afraid of freedom. Humans don’t seem to be good without boundaries. Children find security in life’s early rules – this is school time, this is mealtime, this is playtime, this is bedtime. 

We slip into routines because they are comfortable and safe. Work time, family time, leisure time, holiday time. Lunch is the same time every day. So are our other meals. We go to the gym at the same time. We go out for meals or get takeaways at regular times. We see family at regular times. Plus, or minus a few weeks we go on holiday at similar times of the year.

We get used to the little packets of money every month.

Receiving a lump sum of money can feel like being dropped into the middle of the ocean and being told to find our way to land safely before we drown.

Given that we’ve all dreamed of it, how do we make having access to hundreds of thousands or even a few million pounds not seem terrifying when the day finally arrives but more like the opportunity it is?

Like most things that require a successful outcome, planning and being prepared is key.

Imagine you had to walk from London to Singapore. Would you do it without a map or a plan? A 30-year timeframe is a lot longer than that journey would take. You should probably also use a map and have a plan. At Capital as you know, this is exactly what we do. 

You don’t need to feel left out for not being part of the ‘guaranteed pension gang’. Your lifetime retirement savings give you a much bigger opportunity and with the right planning and guidance you can benefit from having all your pay slips all at once.