The decision made by governments around the world to impose restrictions on citizens’ daily lives to control the Coronavirus pandemic is leading to economic devastation not seen since the Great Depression.
The data speak for themselves:
- 19 percent of workers in the UK are on furlough
- Footfall in retail stores is down by more than 78 percent in the UK (higher than in any other European nation)
- The economy saw a contraction in GDP of 20.4 percent in Q2 2020 following a fall of 2.2 percent in Q1, the biggest in history
Optimistic economists argue that the coronavirus recession is a temporary shock. But thanks to issues such as debt overhang and an aging population, that favorable scenario seems unlikely. The most probable outcome seems to be millions of people being left out of pocket. Retirements that they thought were going to happen will remain elusive.
Now, nobody quite knows what shape the economic recovery from the COVID-19 pandemic will take. Commentators remain bullish about the prospect of a V-shaped recovery. Here, the output returns to its long-run growth path and there are no “permanent losses.”
But others think we are seeing the destruction of real wealth because of business uncertainty. The recovery, as they see it, will be more U-shaped, resuming its pre-crisis growth rate, but never quite returning to potential output (as happened in the US).
The question for the average person is what to do in response to these seemingly uncontrollable events. Many people work all their lives, adhering to a financial plan to deliver the life that they want. But with the current situation being what it is, any certainty that did exist seems to be evaporating.
Given the current circumstances, we argue that it is crucial for everyone (particularly those approaching or in retirement) to construct a “life plan.” The goal is to carefully articulate how to use the financial resources available to you to create a life that meets your values, targets, and aspirations. It goes well beyond a regular financial plan and gets you to ask, “what’s my life really about?”
What Is A Life Plan?
The concept of a financial plan is widespread. It is the idea that you choose a set of material goals and then work out how you are going to get there financially.
The objective of the plan could be something simple, such as having money to go on vacation. Or it could be something truly epic in nature, like squirrelling away money for thirty years to live like royalty in retirement.
But here is the crucial point: a financial plan is fundamentally acquisitive. It is all about getting that pot of gold you want at the end of the rainbow. The prime objective is financial as shown in the process and standards, whereas in the process and standards for a life plan the prime objective is life goals.
A life plan is a different animal. It recognizes that healthy finances are just a means to an end. Having enough money in the bank is great for material comfort. But it is not the whole story. Your leisure and the kind of life you want to lead are important too.
Let us suppose you have a high-flying career and bring home $250,000 per year. Financially speaking, it looks great on paper. You are making more money than 99 per cent of people, and you have plenty of money to put away for a rainy day.
But what if you loathe your boss or your work is sheer drudgery? What if you would prefer to be something more meaningful?
That is where things go pear-shaped.
A life plan is different in this regard. It is deliberately holistic, forcing you to focus on what really matters to you beyond the money. If there is something you value more than financial resources, a life plan can accommodate it.
These questions will become more important than ever in the post-coronavirus world. Stocks may not return the kind of secular returns we saw over the last decade. And job opportunities may not be as forthcoming as they were in the past. Wages might even fall if we get the U-shaped recovery discussed above.
These trends mean that we all need to think less about money and more about how we can have lives aimed at achieving considered life goals.
Critical Reasons to Have a Life Plan for Your Coronavirus Recovery
Thanks to coronavirus, the future is once again up in the air. Nobody can rely on trendlines from the past decade to predict what is going to happen in the next. Everything is wantonly uncertain. It is in this context it is worth quoting this explanation from the Kinder Institute of Life Planning:
“Life Planning connects the dots between our financial realities and the lives we long to live. The Kinder Institute’s tools and trainings make it possible for financial planners and individuals alike to cultivate a Life Plan designed to deliver the most meaningful kind of freedom: The freedom to pursue life’s passions, wherever they may lead.”
You can read more about the Kinder Institute of Life Planning by clicking here. If you want to find a Life Planner in the United Kingdom click here.
Ensuring Sufficient Savings For Retirement
The coronavirus has killed more than 50,000 people in the UK at the time of writing. But it is unlikely that it will significantly alter the current rectangularization of the population pyramid. The population will continue to age, and there will be more dependents per member of the working-age population.
This shift is going to have two effects over the coming seventy years.
- People are going to have to work longer
- They are going to have to save more.
We should not understate the severity of the issue. Women currently face a “shocking” 40 percent pension gap, with female annual pension income touching just £7,000 per year – not enough for most people to live comfortably.
Life planning in these situations post-coronavirus is particularly important. Women need to plan carefully and think about how they finance children and return to the workforce following child-rearing in a way that provides them with sufficient savings for retirement.
University of Sheffield’s research found that women took quite different approaches to retirement saving. Some began putting money away into a pension pot, the moment that they started working, usually as part of an employer’s scheme. Others took a sequenced approach, paying off student loans and childcare bills before seriously considering their post-retirement income.
The recommendations of the research were for partners to work together to achieve joint financial security in the long run. Where one partner chooses to stop working to look after children, the other should make up the shortfall in their pension contributions to avoid economic security issues in the future.
Ensuring Reskilling Later In Life
For many, the risk of outliving retirement savings has increased dramatically. And those already in retirement face the very real threat of low systematic returns in the stock market that cause their pension pots to deplete faster. Coronavirus’s suppression of economic activity combined with an aging population is an unholy alliance.
Life plans, however, help to pre-empt this by foreseeing risks and ensuring that people reskill later in life to meet the future economic challenges and remain valuable. The International Labour Organization goes as far as to suggest that everyone should be entitled to lifelong learning that allows them to continuously reskill and upskill.
The government has already outlined this type of retraining and reskilling as one of their plans for dealing with the expected demographic shifts in the future. The goal is to create a generation of retirees who are willing to work part-time and continue contributing value in a diminished capacity.
Policy incentives also work in part-time retirees’ favour. The government says that people who work part-time will have the same pension scheme enrolment rights as those who work full-time. And the Pension Advisory service provides recourse for anyone who feels like their employer is treating them unfairly.
Ensuring Housing Affordability
Life plans can also assist with housing affordability too and help avoid the impact of negative equity in housing.
The sticker price of housing is extraordinarily high today, thanks to low-interest rates and lack of supply. But taking a long-view and adopting a life plan provides you with a different perspective.
For instance, once you understand the reasons for secular low-interest rates, the choices you should make regarding mortgages become clearer.
We are living through an unprecedented era when billions of new people are joining the global labor market and many jobs can now be done online while at the same time automation, robotics and artificial intelligence are reducing the demand for factory and office workers.
This has given rise to the freelancing industry where employers do not have the on costs of employing workers. The freelancers are not readily organized into unions to negotiate better pay and conditions from employers. They need to form associations of unaffiliated workers and build their own social safety nets.
This has caused the stagnation of wages growth according to the United Nations’ International Labour Organization report which you can read here.
That means that homeowners should get advice early if their home is in negative equity or that they expect that it will become so. This is because the boom market values of houses driven by low-interest rates of the past are possibly going to be now subject to a correction because of an economic Coronavirus recession. Any housing market correction may be long term.
From an individual housing affordability point of view, it is important to recognize that lifting your income by diversifying your skills and being prepared to retire part-time is a solution that overcomes market trends now and into the future.
Accommodating A Future With Less Growth
Even before the coronavirus crisis, it was clear to many economists that growth was slowing – at least by traditional measures. Long-run average growth rates were thought to be approximately 2.5 percent. But in recent years, those estimates have been revised down to 2.0 percent and, in some circles, 1.5 percent, which is barely above the rate of population growth. And coronavirus is not helping matters.
In that context, millennials are having to rethink their money plans. The goal today is not so much about gaining wealth in the same way that the previous generation did. Instead, it is about looking at one’s life and trying to figure out how to make the most of it with scarce resources. That is a crucial change.
Millennials already changed their behavior in the aftermath of the financial crisis.
And today they are:
- Cutting back on spending to cope with the current coronavirus recession
- Increasing their budget allocations to stock purchases
- Using their furlough cheques and other government credits to invest
Having a life plan for a post-COVID world can help to weather the storm. Seeing finances differently and watching how things might play out Towards 2060 is essential.
How Life Planning Needs To Change
Considering the changes wrought by the coronavirus pandemic, The Financial Planning Standards Board (FPSB) (a worldwide professional body designed to foster public confidence in the financial planning profession), and the CFA Institute need to change their approach to work closely with Life Planners.
The coronavirus changes the financial planning paradigm because of the way it is changing trends once assumed to always apply. These trends need to be foreseen by the FPSB and CFA Institute and provision made in their Mission Statements to better represent their clients’ interests:
- Lower long-run growth and potentially lost output
- Lower real wages and income growth
- Substantial downward pressure on equity valuations, reducing returns to investments and the value of pension pots
- Longer working lives with the need to upskill and reskill continuously throughout life
- Lost pension income because of child-rearing and the effect of this on women.
- Improve housing affordability by making housing loans a financial product
The Coronavirus has changed the way we live, and work and these changes are likely to be long-lasting.
Conclusion
Having a life plan, therefore, is essential in uncertain times. It is a tool that anyone can use to ensure that those life events that can be reasonably foreseen should be planned for as it will lead to a better quality of life and achievement of life goals. For those people given access to their retirement savings to pay for essential costs during the Coronavirus pandemic, this approach will be essential.
If you wish to comment on an article or post, please use the contact form below.
