Teachers are fortunate as they have an excellent pension offered with the job, but the recent changes mean that for many, the pension is not as generous as it once was.
Members of the new Career Average Scheme also face the likely risk of their retirement date being increased because this element is linked to the State Pension age. Currently, around half of teachers retire from the classroom before their normal pensionable age however a much larger proportion would like to be able to finish before this.
Knowing that the goal posts could be moved and their retirement date could be pushed further down the line, we are increasingly seeing younger teachers wanting to take control of their financial future.
DEBT: FIRST CONSIDERATION
If you have spare cash and you have debts you are being charged interest on for example, credit cards or loans, it makes sense to pay these off first. The rate of return on any investment is unlikely to be as high as the interest you are charged on these liabilities.
If you have debts that are interest-free or you have low rates of interest, and you’re prepared to take some risk, then you may decide to keep debts and start investing now with the hope of a higher return.
Before you invest any money for the medium to long term, you must be sure you have emergency funds for the short term.
The rate of return for money held in an instant access current account or cash ISA is likely to be below the rate of inflation, therefore in real terms will be losing value. But the purpose of these funds is to pay for unexpected expenditure.
Investments rise and fall in value daily and so the last thing you would want to do is cash in an investment whilst the stock market was against you. This potentially could consolidate a loss that would probably have been avoided by waiting. Therefore, it is important to hold emergency reserves.
Typically, before thinking of investments, it’s best to be free of any loans and credit cards and hold 3-6 months expenditure in cash in instant access accounts as emergency reserves before you start.
IS IT A GAMBLE?
Whilst there is an element of risk, the risk of investing is a different type of risk to that of, say, gambling. And there is no doubt that teachers who are best prepared for retirement are those that started to invest early.
When you are investing, you need to think about what you are doing. You are typically buying small parts of a company, loans, properties or other securities, often as part of a collective scheme, so the risk is diversified.
By diversifying your investments across different geographies, sectors and asset classes you can limit the risks you by holding the shares of a single company that goes bust, a bond that wasn’t redeemed or a commercial property sitting empty.
The hope is that for every element that may fail or underperform, there will be others that still have the potential to increase in value over the long term.
When you gamble, it is typically a zero-sum game where you either win or lose. When you are investing, it doesn’t matter if you back the next Apple or Facebook (although that would nice) all that matters are that most the assets you invest in perform in line with expectations over the long term.
By having a diversified portfolio structured in line with your risk tolerance should help you achieve growth in the long term and limit your risks along the way.