As we’ve already seen, planning and preparation will help you ease into retired life and make sure you enjoy it.
Track Spending Carefully as You Approach Retirement
We’ve already noted that spending will change as you groove into retirement. But that’s not to say you can’t look ahead and anticipate what that might look like. I think the day-to-day expenses of running the home won’t change that much, obviously.
You might be at home more, so may use more heating, but probably not materially. Work-based expenses like commuting will stop obviously, as well as buying in lunch and work attire, whatever that looks like for you. Leisure costs will rise.
You’ll take more weekends away, go on more holidays hopefully, eat out more often perhaps. But depending on your age you’ll get OAP special prices! I think it’s worth taking a closer look at expenditure as you approach retirement. Be intentional about it – what will continue and what will stop? What spending will fall and what will rise?
What ad hoc costs will you possibly incur in the first few years of retirement? I seem to be having a spate of clients I’m working with who are planning to buy a Tesla. What’s your retirement splurge going to be?
Here’s a possible experiment. You could perhaps live to your anticipated retirement income for a month and see what that looks and feels like, essentially spending and budgeting as if you’re already retired.
Take notes about the process and see if it feels good. Is the expenditure level enjoyable? If it’s a real burden to live to that level, then you might need to adjust and say, “I’m going to have to draw more off my capital in order to live a pleasant life and not one that feels a bit mean.”
And then we’ll need to see what impact that has on how you invest and how you move your pieces in advance. There’s no point retiring and being miserable after all. If not, then adjust and see how the amended spending level feels.
Plan for Cashflow Management
We’re going to need a plan for cashflow management. Essentially this means: where is the money going to come from and when, in the early years of your retirement?
Let’s say you’ve planned your timeline and you work out that you’re going to need to find capital to top-up your income by £20,000 in year one, £10,000 in year two and £15,000 in year three – that’s a total drawdown from capital of £45,000 in three years. You have a combination of personal DC pension funds, ISAs, maybe some Premium Bonds and some savings. Where should the money come from?
I think as you head towards the finish line, you want to make sure that your expenditure for the first two years of retirement is in cash or near-cash investments like money market funds. This means you’ll need to be keeping an eye on your investment values and working out where and when you should take money out of investments and into cash so you’re ready when the time comes.
You should perhaps be thinking of this in the three years or so before crossing the line. Why three years? Well, you don’t want to leave it till six months before your retirement date and then there be a market correction and you’re pulling money into cash when it is already depressed. A three-year period is likely to have enough opportunity for you to pull money out at a ‘good’ time.
As far as where the money should come from, have a mind to tax-efficiency of course. You might want to take some or all of the tax-free cash from your pension funds. Or you could sell down your ISA. Ideally take it from your Premium Bonds, because chances are you’re holding too much low-return money there anyway.
Unfortunately, this might not be that simple a decision. If you’re likely to have big Lifetime Allowance issues down the line, then it may well serve you to drawdown a chunk of your pension earlier rather than later. The balance to that is that pensions are inheritance tax-efficient so you may have to choose your tax poison. An adviser can help here, of course.
Remember that spending is your biggest lever. In the long holiday of your retirement, you’re going to need to be prepared to make adult decisions about spending as you go along. By that, I mean that if your portfolio has had a very difficult year thanks to markets or Coronavirus or whatever, then maybe you might not increase your spending next year. Or maybe you defer buying the new car, or making gifts to the kids.
In Beyond The 4% Rule, Abraham Okusanya talks about different rules for spending, for example, only increasing your spending by inflation if your portfolio has risen that year. I think you’d be well served by thinking some of those things through in advance. Even if it’s only an abstract thought experiment for now, it’ll be useful I think.
Gear up for Simplicity
When I’m working with clients, I often draw them a picture. I take a piece of paper and draw a horizontal line across the middle of it. Below the line are two accosts labelled savings and current. This is clients’ domain – this is what they have to manage. Everything above the line is the portfolio, and consists of investment and pension account primarily, plus other stuff. It’s this that I’m asked to look after.
If you’re not delegating to an adviser, then you’re responsible for what’s going on both above and below the line, with both the investing and spending parts of the retirement planning piece.
For most of you, the bit below the line (savings and current accounts) will come as second nature, planning your spending and cashflow, and moving money between accounts to meet short-term needs. But investing in retirement is a bit more involved than in the wealth-building phase of our lives. As such, we want to make it as easy as possible to stay on top of it.
We looked earlier in this series at positioning the pieces. There is just no point in making things more difficult for yourself than it needs to be. Simple is best, and especially as you enter into retirement.
Get your portfolio ready now so you can move the pieces in to the right place before you cross the line. You’re aiming for simplicity and flexibility, so you can take money easily, from different pots at different times, depending on the prevailing winds at the time.
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