You might want to spend more in retirement but are afraid to do so.
The problem is, if you don’t start spending more you may find you don’t get to do all the things you want to in life.
Whilst we don’t know what the future is going to look like, with a little thought and planning you can build some structure into your finances that gives you the confidence to really go out and enjoy life with no regrets.
Why trying to spend more in retirement is hard
Retirement is a huge life event and the point at which you move from having a job that allows you to top up your savings on a regular basis to having no new money coming in.
You enter the withdrawal phase of your life. You will only ever really be taking away from your savings pot.
The two big challenges for your savings in retirement are firstly, you don’t know when you are going to die and secondly, you don’t know how much things are going to cost in the future.
Therefore, spend too much too soon and your retirement savings could dwindle at an alarming rate.
On the other hand, retirement can be the most exciting part of your life. You no longer need to work. You have complete control of your days and now is the time to enjoy those hard-earned savings.
After all, we only have one life and we never know when it is going to end. You don’t want to be one of those people on your deathbed with lots of money still in savings and full of regrets over the things you didn’t do.
Even if you realise that you must spend more in retirement to enjoy a fulfilled life it can be hard to adjust your internal wiring.
If you have the money to enjoy a good life in retirement, it’s because you have been a diligent saver. You have learnt to control spending splurges and to go without, even when you really want something.
Changing from a saver to a spender is not going to be easy.
5 ways to help you spend more in retirement
Here are some subtle ways that can get you in the right mindset and give you the confidence to live life in the moment and spend more.
#1 – Have a cash buffer
Cash should always form an essential part of your overall retirement portfolio.
When I say cash I mean money in an easy to access savings account or Premium
Bonds.
I would usually recommend at least two years’ worth of spending plans is held in cash. So that means, all your bills, fuel, food, discretionary spending and holiday plans.
The idea being that this gives you confidence that you always have a large chunk of cash you can access in an emergency. If something breaks in the house, the money is there to quickly repair it. If your friends invite you on a lavish holiday, the money is there to just book it.
You don’t need to worry about what is going on in the stock markets because you have plenty of cash to last at least two years. This is really going to help with your overall investment strategy – more on this later.
#2 – Secure an income for essential spending
If you are a naturally cautious person, then you might want to secure an income in retirement.
You might already have done this if you have a defined benefit pension (also known as a final salary pension) or are at State Pension age.
If you are not in this position or the income you receive is still not enough to cover all your basic core spending, then you could use other savings to secure more income.
This could be in the form of a pension annuity or a purchased life annuity.
You can choose an amount of your pension or other savings to top up your income and make you feel more secure that all your core spending is covered for the rest of your life. So even if you were to spend all of your leftover savings, you would still be able to live.
#3 – Set up a regular withdrawal from your investments
The downside to opting for an annuity as described above is that you will need to give up a chunk of your savings to secure the income.
You might not like the idea of giving up savings especially if you then die shortly after securing the income.
Whilst you can add features to an annuity that can protect your capital or pay-out to a spouse after you’ve gone, adding these features will reduce the initial income you are offered. Which then means more savings might be required upfront to secure the income you need.
An alternative idea is to set up a regular withdrawal from your investment portfolio.
Whilst the underlying savings will still fluctuate up and down with the stock market, in terms of what you see in your bank account, it will be like receiving a monthly income.
This can be helpful to budget and sometimes force you to spend so you don’t end up with cash in your bank account building up.
This method gives you more flexibility than an annuity as you can adjust the monthly withdrawal as your circumstances change whereas you can’t with an annuity.
#4 – Keep a large proportion of your retirement savings invested in the right investments
Another tricky point to understand when it comes to retirement is that you shouldn’t automatically be more cautious with your investments.
There is a tendency to think that as you will be withdrawing from your investments now, you should be more cautious.
However, you need to understand that your retirement savings now need to last the rest of your life. As an example, for someone retiring at age 60, this could mean at least a 30 year period, potentially even longer.
If you don’t invest and keep your money invested, generating a return above inflation, then you will be losing purchasing power every year. Whilst on paper, £1million in the bank today will still look like £1million in the bank in 30 years’ time it will not be able to buy you the same amount of stuff that it buys you today.
This means a good proportion of your retirement savings will need to be invested in the great companies of the world – the global stock market.
Yes there will be periods of high volatility and your portfolio will be down in value significantly at certain times, but these periods are only ever temporary. Over a 30 plus year period you have plenty of time to ride out the volatility and enjoy the recoveries and much longer periods of positive returns above inflation.
This is also why you should keep a cash buffer as mentioned in point one above. Most of the severe stock market declines we have experienced in the last 100 years last no longer than two years. If you have a cash buffer with two years’ worth of spending, then you can leave your investments untouched and allow them to recover from any declines whilst you still enjoy spending the same amount from cash.
#5 – Use a Financial Adviser
A good Financial Adviser can offer huge value at retirement.
Using sophisticated software, they can stress test your retirement plans against what has happened over the last 100 years to see what would have happened to your savings using real life historic data.
They can also tell you what you can afford to spend in order to get your savings down to zero on death.
The financial plan is the essential part of your retirement but coupled with this will be an investment strategy that delivers your spending goals. Making sure you are invested correctly and maintaining your purchasing power.
All of this will give you the confidence to spend more in retirement. A good Financial Adviser should actually be encouraging you to spend more so you can really enjoy life.
As a final point, retirement may seem like the final life event before death but actually retirement is a journey in itself.
There are different phases to retirement and the research shows that people will generally spend less in retirement during their later years.
Think back to your own parents. If they are still alive now, what do they spend their money on? I’m guessing the older they are the less they spend on holidays and travel and ultimately just spend on regular bills.
Of course care fees may be something to think about in later life, but it’s still the minority of retirees that go into care homes.
Armed with this information, it means you can spend more in retirement now whilst you are at your youngest and hopefully fittest. Safe in the knowledge you will spend less when you are older.
It’s time to tick off items on that bucket list.
If you are not sure what to do with your personal and workplace pensions at retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
