Are You Spending Too Little In Your Later Years?

It has been three years since the so-called ‘pensions freedoms’ came into effect, opening up the ability to draw from your pension funds without limit.

There was an initial media frenzy over fears that retirees would blow their savings on sports cars and other frivolous expenditure (sports cars? frivolous?!) before going cap in hand to the State for the meagre State benefits on offer.

There has been no evidence for this so far and, indeed, recent research from the Institute for Fiscal Studies has found retirees are doing the exact opposite – spending too conservatively.  Its report into the use of wealth in retirement looked at how property and non-pensions financial assets were drawn down by retirees between 2002 and 2015.

It found: “On average, real net financial wealth is drawn down (reduces) by (at most) 17% between the ages of 70 and 80 and 31% between ages 70 and 90. This is significantly slower than the decline in remaining life expectancy between these ages.

“This suggests the majority of wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending.”

Naturally, those retiring today may have a different spending pattern to those before them due to defined benefit pensions forming a smaller part of their income; a gap which can only increase.

Nonetheless, the implication is that the current spending rate would leave retirees with almost 70% of their real financial wealth by the age of 90, and that is not including property.

Just 6% faced costs for medical treatment outside the NHS in their last year of life. Only 7% received assistance with daily activities from a privately paid employee in the run-up to death. Some 21% did stay in a nursing or residential home in the last two years of their life, but not all of these would have paid for this care privately.

For those who do end up needing to fund care, property wealth remains a source of doing so. The paper found that more than a third of homeowners at age 50 would move by age 70, and over half would move by age 90 if they survived that long, albeit the majority of house moves were for personal rather than financial reasons.

Our Comment

A vital part of our role is to help you work out a withdrawal strategy for your investments which is not only sustainable but also provides the maximum ability for you to spend wisely and confidently on those items which will enable you to live your life to its fullest.

Naturally, such ‘spending’ may include the fabulous holiday you have always dreamed of, but it may equally include helping to fund your grandchild’s university education or making gifts to your family from which you may experience their enjoyment during your lifetime.

For many years, perhaps Governments and the financial planning industry have overly emphasised to retirees that their cost of living in later life will go through the roof and this may be one reason why they are overly cautious about spending their hard-earned wealth.

Reckless spending is one thing, but let’s not forget, life is for living.