Maldon Nub News, in partnership with client TFP Financial Management, brings you occasional articles about planning for your life after work.

Here planner and TFP director Dan Haylett has shared his thoughts on the changing tide of retirement spending

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Let's Set The Scene

When Pension Freedom was introduced in the UK in 2015, politicians and industry commentators feared that retirees would blow their retirement savings with little regard for their future needs. The media whipped up a frenzy about retirees splashing out on Lamborghinis and cruises, only to fall back on state benefits. If only someone had bothered to look at the data on how wealth tends to change during retirement, they would have saved us all the pointless aggravation.

 Thanks to research by the IFS, it appears that people are doing the exact opposite of what the industry feared. They are in fact spending too conservatively in retirement. The study looked at how property and non-pension-financial assets (savings, investments, etc.) are drawn down within three cohorts of retires aged between 69 to 91 over the 12-year period between 2002 and 2015.

You should take note of its findings...

It found that on average real net financial assets declined by

14% for the youngest cohort born between 1930-34, 13% for the next cohort born between 1925-29, and 1% for the oldest cohort between 1920 -24.

Rowena Crawford, the author of the brilliant report noted that, assuming that the rate of drawdown at a given age does not differ between generations, this observed behaviour suggests that, on average, real net financial wealth is drawn down by (at most) 17% between ages 70 and 80, and 31% between ages 70 and 90. This is significantly slower than the decline in remaining life expectancy between these ages.

The Office for National Statistics projections indicate that expected remaining life declines by 75% between ages 70 and 90 for both men and women. This suggests that, unless there are large costs at the end of life (which research suggests for many will not the case), the majority of financial wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending and gifting whist alive.

The Changing Tide of Retirement Spending

Retirement spending has undergone significant transformations over the years, driven by factors such as shifting economic landscapes, evolving pension schemes, and changing lifestyles. Traditionally, you were expected to reduce you spending, adhering to a more frugal lifestyle as you transitioned from earning a regular income to relying on pensions and savings. However, recent data and analyses tell a different story, one of complexity and changing priorities.

Early Retirement Years: The "Go-Go" Phase

The initial years of retirement, or as I dub them the "go-go" years, are characterised by increased spending. You are healthier, more active, and eager to engage in travel, hobbies, and leisure activities that you may have deferred during your working years.

According to the Office for National Statistics (ONS), spending on recreation and culture among UK households headed by someone aged 65 and over increased by approximately 5% between 2001 and 2019. This reflects a broader trend of people prioritising experiences and quality of life immediately following retirement.

Mid to Late Retirement: The "Slow-Go" and "No-Go" Phases

As you advance in age, there is a noticeable shift in spending patterns. The "slow-go" years see a gradual reduction in discretionary spending, with a pivot towards maintaining a comfortable and active lifestyle as well as health-related expenses. Spending typically focuses in on more less exuberant leisure as well as the ability to have money and time available for family and friends.

Data from the ONS indicates that healthcare spending among the older population has been rising, a trend exacerbated by an aging demographic. However, this is often overblown to the degree that many think care fees will wipe out any savings but still, this phase often requires careful financial planning, as you must balance the desire for independence with the increasing need for healthcare and support.

The latter part of retirement, or the "no-go" years, often sees a further decrease in overall spending but a potential increase in costs associated with later life needs, whether in-home or in a residential facility. The ONS reports that while overall household spending declines, the proportion of income spent on household goods, services, and health continues to rise in these later years.

Retirement Spending Expectations vs Reality

In a paper by the International Longevity Center, Dr. Brancati and her colleagues conducted a detailed analysis of two large datasets, the Living Costs and Food Survey and the English Longitudinal Study of Ageing (ELSA) to gain insight into income and expenditure patterns of the elderly.

The research found that spending in retirement declines progressively in real terms.

As people get older, they spend less. A household headed by someone aged over 80 spends, on average, 43% less than a household headed by a 50-year old.

And when you include the amount of money people pay for their mortgage as household expenditure, then the decline becomes even steeper with households headed by someone aged 80+ spending 56.4% less than households headed by a 50-year-old.

The Impact of Pension Reforms and Savings

The pension reforms in the UK that I spoke about at the beginning have significantly impacted retirement spending patterns. These reforms have given you greater flexibility in how you access and manage your pension pots, leading to a more individualised approach to retirement spending. However, this flexibility also requires a higher degree of financial literacy (something which is severally lacking in adults across the globe!) and planning to ensure that savings last throughout your retirement years. The Pensions Policy Institute highlights the importance of guidance and advice in navigating these decisions, emphasising the varied approaches individuals take in allocating their retirement funds.

Looking Ahead: Challenges and Opportunities

Spending your money in retirement is fraught with both challenges and opportunities. With life expectancies increasing and the cost of living rising, you will need to be more strategic in managing your resources. This includes not only financial planning but also considering alternative housing options, healthcare provisions, and social care needs. Moreover, the evolving nature of work, with more people engaging in gig economy jobs or facing uncertain employment prospects, will further influence your retirement spending patterns.

As we look to the future, it's clear that retirement spending patterns will continue to evolve, reflecting broader economic, social, and demographic trends. The key to navigating these changes lies in flexibility, planning, and the continued pursuit of a fulfilling and sustainable retirement life.

So, what does that mean for me?

 Retirement portfolios can fail us in two ways:

Living cautiously might "leave too much on the table" when our money outlasts us.

Spending too much can mean running out of money before we run out of life.

You must establish a withdrawal framework that is not only sustainable but also provides the maximum level of sustainable spending. This framework needs to take account of how your expenditure is likely to change during your lifetime. It also needs to account for the possibly of periods of extraordinary non-conventional spending patterns. Understandably, this is no easy task, but the traditional withdrawal rate framework that assumes withdrawals will increase in line with inflation through your retirement needs to change.

Instead, the assumption should be that spending will fall by between 1 to 2% a year in real terms throughout retirement.

The implications for you are that you can afford to spend more in the early part of retirement in full knowledge that your expenditure will fall as you get older.

You may realise that you can afford to retire on less of a pension pot than previously thought. The end result will ultimately be greater happiness and confidence for you and in your retirement plans!

 For years, the financial industry has indoctrinated you into thinking that their costs of living in later will go through the roof. However, life is for living and you need to bear in mind when planning for retirement that you can't take your money with you when you go.