Welcome to the first of our series of guest articles written by the Life After Yachting support network. These articles will be filled with insight and advice for yacht crew, and the authors will be on hand via our online portal to provide ongoing support when you need it. Registration for the portal opens on September 1st and you can find the link on the Life After Yachting Website. Please email us if you would like to be notified directly when the portal opens.
The first article is brought to you by the fabulous Emma Parkes from Church House and discusses all things financial.
Take it away Emma...
Are you prepared financially for a Life After Yachting?
Transitioning to a Life After Yachting can be a difficult process, fraught with stress, anxiety and indecision. One key factor that can make this whole process more comfortable and successful, is to get yourself into a strong financial position that will give you flexibility and time to make the right choices for you. Below are 5 key points that you should consider.
Things to be doing now
- Plan your exit - cash flow modelling, so you know what you need to be doing now to achieve the future you want
- Make the most of your savings – consider investing
- Liquidity & Control - Make sure your investments are liquid and that you have control over how much you add and when
- Tax efficiency - Make sure you are saving as tax efficiently as possible whilst working at sea so that you minimise any tax you might need to pay once you return to land
- Pension - Start your pension as early as possible!
1. Plan an exit
First things first, you need to be organised and planned for an exit from yachting. This is not only a plan for a fixed date, but a “what if” contingency plan should you have to give up yachting for reasons beyond your control – be that injury, family reasons, whatever. You need to know that you have savings available to look after you should you not be able to work. I would suggest having at least 6 months’ living expenses at your disposal at all times in case of an unplanned exit from the industry. Everyone should have this in place from the start of their career – just in case.
Now if you are making a plan for a scheduled exit, there are various factors that you should consider, that you may not have had to worry about previously. These will vary slightly depending on your reason for leaving – are you looking for a land based job, setting up a business or retiring for example.
- If you are leaving to find a new job, you will need a realistic estimate of how much you hope to earn NET of tax i.e. after you have paid tax. Then factor in rent or mortgage payments, and of course all of those little extras you might not have had to pay for before – deodorant, shower gel etc! This all mounts up and will really impact what you will be left with at the end of a month of working on land. You should find out if your new employer will offer your things like private health care, and what pension benefits they will offer you. Are you on a contract, a full time employee or self-employed? This will impact things like paid holiday or sick leave.
- You may be leaving to set up your own business. In this case it is really important that you keep that emergency buffer separate from cash that you might be thinking of investing into your new business. It is all too easy to misjudge how much you plan to invest in a business and leave yourself with nothing at all to live off.
- Even if you are retiring and have built up a nice pot of savings over your career, it is of course really important to have a clear idea of what you will need to live off to have the lifestyle you want and have been looking forward to.
Cash flow Modelling
A really good way to work out the sums for these considerations is to use cash flow modelling. A cash flow model is a detailed picture of your assets, debts, income and expenditure. We can then project this forward, year by year, using assumed rates of growth, income, inflation, and interest rates. We can also model a range of different ‘what if’ cash flow scenarios and outcomes. This allows us to address any major concerns, including:
- What you must do now to achieve your financial objectives
- How seemingly minor changes can dramatically change your financial future
- How to avoid running out of money
- How long your will be able to support your desired lifestyle in retirement
Contact an adviser who can help you run cash flow models that you then keep up to date with changes in your career or hopes for the future, meaning that you can stay on top of what you need to be doing now to achieve these.
2. Make the most of your savings
You have worked hard to get them so now they need to work hard for you! As explained, always keep a cash buffer in case of a crisis. To keep all your savings in cash however could be seen as “reckless caution!” In other words people see cash as risk free and beyond that are recklessly forgoing the potential for growth and suffering the risk of cash. Cash is not risk free – inflation is a very real risk.
For those who might not be entirely clear about what inflation actually means, it is the rate at which the general level of prices for goods and services is rising, thereby eroding the value of the cash you hold.
As an everyday example, we can look at the price of a cup of coffee. I have an example here which neatly explains it. The example is in dollars but of course inflation applies in all currencies.
In the year 2020 your coffee can cost as much as $2.50. This means that $100 in the year 2000, when a coffee would have only cost $1.00, could have bought you 100 coffees. The rising price of coffee (i.e. inflation) means that same $100 can now only buy you 40 coffees.
We can see how inflation effects savings when we compare the growth of cash savings versus equity markets over the last 10 years. £10k invested in cash 10 years ago is now worth £8,424. This is because of inflation which has averaged 2% annually over those 10 years – your £10k from 2010 will no longer buy you the same number of coffees, tanks of fuel, pints of beer because they have all got more expensive. If inflation is running at 2%, and your bank is paying you 0.5% interest, you are effectively losing 1.5% per year – a scary thought!
The stock market however, as represented by the FTSE All Share, over the same period has turned £10k into £21,354. How has it done this? Well – you are buying into the companies who are increasing their prices in line with inflation and other market factors, thereby helping to retain the “real” value of your investment, and ideally growing your nest egg.
It is widely expected that within a year or so post COVID-19, inflation will start to increase so this threat of inflation is ever more present. If the rate of interest paid on your cash does not keep pace – you are losing money in real terms. With interest rates at record lows, and indeed some EUR accounts offering negative interest rates, this is a very real worry.
So what can you do? Consider an Investment Portfolio
So we have discussed the risk around saving in cash, so what about the risk of investing. People sometimes consider investing to be high risk but really it needn’t be. A good investment manager can tailor a portfolio for you to meet your objectives and appetite for risk, by investing in quality, well run companies and stocks. There are other benefits too.
Diversification is an important risk management strategy that mixes a variety of investments within a single portfolio. By holding a mix of distinct asset types, your Investment Manager can limit exposure to any single asset class or risk. Diversification strives to smooth out unsystematic risk - risk that is inherent in a specific company or industry. The benefits of diversification hold only if the securities (and currencies) in the portfolio are not perfectly correlated—that is they respond differently to market influences.
Historically, portfolios constructed of different kinds of assets have yielded higher long-term returns and lowered the risk than that of individual holdings or securities. Property is often the go to investment for yachties, and there is of course something to be said for bricks and mortar. However, I would caution against investing all your hard earned savings in one asset class. Remember that we are usually overexposed to property anyway. If we are lucky enough to own our own house or flat, that usually represents the majority of our assets, so to then invest further in property does mean you are significantly focusing your risk in one area.
By saving wisely throughout your career, your investment portfolio can be tailored to generate a targeted level of income. This might be to supplement your living expenses whilst setting up a business, or indeed might help you to afford to grow your family, or even retire. This flexibility to switch a portfolio from a capital growth mandate to income is invaluable as we move through life and the different challenges it brings.
Equity markets have fallen decisively since January 2020 when Wuhan went into lockdown, but have stabilised during April, May and June. So is now a good time to invest some cash reserves into the market? If you are a long-term investor with a minimum 5 year time horizon, and you have cash reserves to cover contingencies, then yes, investing cash that would otherwise be in the bank producing next to zero returns (or a negative return after inflation) makes good sense at current levels. Why? Because you are buying into today’s market but at 2016 prices. It has been noted that financial markets are the only “shop” in which you hoist up a sign saying “33% off” and everyone rushes for the exits!
In the short-term, markets may well take another tumble on bad news, in which case we will utilise the opportunity to invest more of the cash we continue to hold as dry powder during these uncertain times. But unless you believe people are going to stop spreading marmite on their toast, why would you not add to a long term holding like Unilever 30% cheaper than you could last year?
3. Liquidity and control over investments
You should consider if your assets are “liquid”, i.e. can you sell the asset easily converting it to cash in a short amount of time. Cash is the most liquid asset. However, some investments are easily converted to cash, like shares, gilts and bonds. So they are also referred to as liquid assets. Land, property, or buildings are considered the least liquid assets because it could take weeks or months to sell them. The same can be said for assets like wine or cars, since these items take time to sell, and in order to release cash quickly, you may have to accept a price well below what you believe the asset to be worth. It is important that your investments are liquid so that they can be flexible to support your needs.
If you have saving plans, make sure they are flexible. Try not to get trapped into a plan that has a fixed level of contributions that are required every month for a number of years. You may find that you are not able to make the payments if you leave yachting, which could leave you subject to nasty surrender fees and penalties.
4. Future tax efficiency
What can you do to minimise tax liabilities – many yachties will qualify for the Sea Farers Earnings Deduction whilst at sea, so are tax exempt. But it is really important to make sure you are saving in a way that allows the assets you have to remain out of the tax net once you return to land. For UK yachties the use of ISA and pensions are obvious ones. Then there are other options that can be explored such as offshore bonds.
Emma Parkes, Yacht Crew Investments by Church House