The challenge of spending in retirement

It might come as a surprise to learn that many retirees are afraid of spending their money in retirement. Modelling how much a client can sustainably spend in retirement is one of the most common ways that financial advisers add value.

It can be mentally challenging to switch from 'savings' mode to 'spending' mode when you stop working. Just think about it, all your working life is about learning to save (and pay off debt), then when you retire, you are being told to forget about saving and start spending! For some, choosing to spend significantly less than their portfolio and income could support, may be to the detriment of their overall happiness. And that is a bigger problem!

There are a number of things we consider when it comes to helping our retirees feel comfortable about spending.

One of the simplest options is to ‘test out’ retirement by transitioning into retirement and working part-time. This helps to get used to withdrawing funds from your retirement accounts, and partially “funding” your income needs. As we are living for longer, many people enjoy working and this supplements.

Another option is to segment spending into “needs, wants, and wishes” buckets . With this option we look to source the income needs to support the expenses in each bucket. As an example “needs” can be covered by guaranteed income sources or other defensive assets and “wants” and “wishes” are perhaps sourced from portfolio assets which may be subject to more risk (therefore wants and wishes will need to be considered in line with current economic conditions).

The third option simply requires an estimate for monthly expenses and a regular payment to meet those expenses. Structuring your investment philosophy so that it supports your ongoing needs and understanding how and when to use your reserves and buffers will provide a system that helps you get comfortable with spending.

Understanding your goals, reality testing your spending and checking in on your feelings and behaviours helps to make this transition one of excitement and joy rather than fear and uncertainty.

If anyone you know needs guidance in this area, please let them know we are here to help.

General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.