We’ve seen that investments have to work hard to support our income needs in retirement. But a key variable as to just how hard they have to work is the level of withdrawals they are required to support.
Retirement has a tendency to magnify bad habits that were already in place. So if I get a client who is already spending too much while working, but they’re lucky enough to have inherited or just had a big DB scheme with a fat lump sum, I can usually tell that they’re going to spend it too quickly.
I often encourage my clients to let go a little bit in the early years of retirement. Buy the camper van or the Tesla that they’ve been dreaming of; take the big holiday or treat the kids. But when we’re planning for clients, I assume that spending will find a level and I try to help my clients work out what the optimum level of income actually is.
When we’re planning their retirement timeline, we’ll often talk about the early years of retirement being 3-5 years followed by the (hopefully) long period after that when things are ‘normal’ in terms of expenditure.
In normal life, expenditure can be anticipated. The things that can’t, in retirement in particular, are long term care or other medical costs and maybe having to help out a child after a relationship breakdown.
Other than that, there’s not too much that’s likely to jump out of the woodwork and surprise you. I did have a couple in their late 70s divorce once, and that was a financial challenge, I tell ya. But that’s unusual.
As with all aspects of our finances, expenditure must be intentional. If it isn’t, then the only one to blame if your money runs out too quickly is yourself. I used to have a client who changed his car about every 18 months.
An these were pricy cars – he had an Audi TT, a Porsche Macan and a Jaguar F-Type all in the space of about six years. I calculated the deprecation he suffered on those three cars alone to be about £50k, if not more. You might as well open your windows and start chucking money outside – madness. No clever investment laddering strategy is going to compensate for that.
I find that those who have built wealth themselves during their working lives have no issues with this. Those who have inherited money late, or who spent everything they earned while working but were fortunate to be in a great DB scheme with massive lump sum benefits – those are the ones who struggle.
Part of the planning for an expensive first few years of retirement followed by a more ‘normal’ long-run after that is simply to get it out of the system and to reward and mark the event of passing into retirement – nothing wrong with that as long as it is done intentionally.
I think the above piece brings up some great financial challenges that retirement can bring, more time to spend money, more things you want to do now you have the time and also thinking about the stuff you already have, maybe time to declutter and sell stuff and make a few bob. Getting into the swing of your new retirement lifestyle is a challenge indeed and by having a weekly finance meeting over a coffee is a great way to keep an eye on the finances and see what’s coming up, birthdays, travel plans etc. So don’t loosen those belts too much before you have your new lifestyle set down and keep up the good financial plan that you have created over the years and enjoy that retirement with a clear plan.
Do you find that those who have built wealth themselves often struggle to spend it? Asking for a friend…
But I am concerned for those that suddenly have to manage a pension and a lump sum when they have never really managed investments or money their whole life. The horror stories you read about lottery winners comes to mind for this situation. Though I don’t know how common that really is.