A client once thanked me for advising him he had plenty of money and could comfortably afford to buy the £30,000 car he wanted. He just needed reassurance from me. Sometimes that’s all it takes. Of course, I did have the benefit of having reviewed his cash flow forecast before the meeting so I knew he had sufficient cash flow for the rest of his life to never run out of money because he has a high level of guaranteed income even if he were to buy a new car every few years.
What I have observed is that the clients who have been careful with their money by not wasting it have great difficulty in spending it once they have retired. I guess it is difficult to change the habits of a lifetime. These same people tend to be quite generous with gifting money to their children and grandchildren though.
So how do you spend money in retirement with confidence?
The key is to work out realistically how much you need to spend on essentials such as daily necessary living costs and how much you would like to spend on luxuries for example holidays, entertainment, dining out etc.
You then need to estimate how your spending needs will change over the rest of your life.
For example you may wish to spend a lot of money on holidays between the ages of 55-75 then a lot less from age 76 onwards.
How easy is this to achieve in practice? Quite easy in my experience depending on your financial circumstances.
For example, if you have a high level of guaranteed income from sources such as state pensions, annuities and final salary pensions and such income comfortably exceeds your spending needs then there is in most cases very little to worry about.
If, on the other hand, you have little in the way of guaranteed income apart from state pensions then you need to a) ensure that your investments and pensions are well managed and b) make sure the level of income withdrawals is reasonably sustainable to ensure you never run out of money.
In our experience an income withdrawal rate of 3% p.a. or less is usually sustainable and sufficient to produce long term capital growth too.
Working with a financial planner is the best way to ascertain the right level of income withdrawals for you by using cash flow planning software including various “what if” scenarios. In my experience, this gives clients great peace of mind and clarity and leads them to spend money in retirement with confidence. You know it makes sense.*
*The Financial Conduct Authority does not regulate Cash Flow Planning. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.