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“I’m going to spend, spend, spend!” was Viv Nicholson’s response to her husband’s big 1961 win on the football pools, a popular flutter at the time. She wound up penniless, becoming a symbol of vulnerable profligacy thanks to a play, a musical and her image on the cover of the Smiths’ hit single “Heaven Knows I’m Miserable Now.”
Most of us are afraid of living beyond our means. The anxiety is acute in relation to retirement. Suppose I raid my defined contribution fund too heavily via drawdown? What if my investments disappoint?
Questions like these come into sharper focus as you approach retirement. I am at that stage myself. The natural follow-on question is: “How should I think about — and plan — retirement spending?”
The first step is to assess how justifiable our anxieties are. Only half of retirees on moderate incomes in the 65-75 year age bracket are confident that their private pension will last them for life, according to a recent survey by Aviva and Age UK.
Clearly, many older people get by on very little. But about 60 per cent of retirees surveyed separately by NMG Consulting for Invesco said they lived comfortably within their means, often with plenty to spare.
The going tends to get easier the older we become. Back in the day, financial advisers referred to the graph plot of pensioner spending as a “retirement smile”. Expenditure was high for younger pensioners, dipped in mid-retirement and rose again for older seniors.
Among homeowners, the pattern has changed. Their spending generally diminishes with age. This is nicely illustrated by research from the University of Bath. The real expenditure of owner-occupiers was around a third lower when they were 85 or older compared with spring chickens in their mid to late sixties.
Encouragingly, retired homeowners of any age defined their largest single spending stream as “luxuries”. Life is regrettably tougher for social tenants. But for many of us, “the little money comin’ worked out well,” as Chuck Berry put it.
Diminishing spending contrasts with incomes that are generally flat after lump sum tax-free cash withdrawals. That is the dispensation for most defined benefit pensioners. Defined contribution savers can, if they want, use drawdown to align income with likely spending: higher to begin with and lower later on.
If you have a mix of retirement plans, you could opt to run down defined contribution pots in your early-to-mid anecdotage and rely on defined benefits thereafter.
You might then avoid becoming a hefty net saver in later life, as some retirees do. This seems rather pointless, particularly since the government decided to include pension pots in the calculation of inheritance tax.
“Financial advisers often try to encourage clients to spend more,” says Miba Stierman of NMG Consulting. Resistance is high, however. Retirees routinely cite potential “care costs” as a reason for thrift. However, just 2.5 per cent of the retired population live in care homes, an expensive form of assistance with daily life. In my view, ruinous care bills are a relatively low risk for better-off retirees though as Stierman remarks: “These costs are frequently a place holder in our minds for everything that might go wrong — a legitimate way of phrasing broader fears.”
Financial planning can dispel some uncertainties, including the optimal size for a rainy-day reserve. I would advocate taking professional advice, even if you are a financial native. You can do some homework of your own too. Sir Steve Webb of consultancy LCP suggests a simple exercise to quantify likely post-retirement spending: “Look at your credit card bill and think what you would still be paying, what expenses would drop off and what might replace them.”
In my household, we define spending according to the template set by company accounting: “operating expenditure” (utility and grocery bills, for instance); “non-recurring costs” (extravagances, some of which inevitably recur) and “capex” (repairs to my 1970s Scottish teeth, for example).
Online calculators will give you a sense of how much money you can take out of drawdown products until the cupboard is bare. According to one of these, a fund of £500,000 returning 5 per cent would supply you with a pension of £3,000 per month for 20 years. But such calculations are pretty generic. A good adviser should be able to model your prospective income — and the spending it will finance — to reflect more accurately your assets and risk appetite.
Review your progress regularly and seek further advice when needed. I am sticking all my numbers on a spreadsheet for this purpose. Fellow dataholics will, I know, chuckle at this and purr: “A spreadsheet you say? Mmm! I like the sound of that!”
Sir Steve warns against overindulgence in financial modelling: “Most people reach retirement as part of a couple. But one of you will be going first. You could be bequeathing a complex strategy and set of financial products to someone who does not wish to engage with them.”
Even so, I like to imagine an alternative reality in which Viv Nicholson, a picture of concentration beneath her beehive hair-do, bashed away on a mechanical calculator to project orderly decumulation of that pools win. The Smiths’ subsequent single “Financial Planning Makes You A Happier Person” would have flopped, returning singer Morrissey to obscurity and limiting the audience for his misguided opinions.
Both outcomes would, I believe, have left the world a better place.
Jonathan Guthrie is a writer, an adviser and a former head of Lex; [email protected]