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Abraham Okusanya: Advisers must help get retirees spending

retirees spendingWhen pensions freedom was introduced three years ago, it was feared retirees would blow their savings with little regard for their future needs.

The media whipped up a frenzy about them splashing out on Lamborghinis, before falling back on state benefits. If only someone had bothered to look at the data on expenditure patterns in retirement.

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.

Retirees not recklessly spending pension wealth

It found: “On average, real net financial wealth is drawn down by (at most) 17 per cent between ages 70 and 80, and 31 per cent 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.”

Of course, 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. And this gap is only set to widen.

Nonetheless, the implication is that the current spending rate would leave retirees with almost 70 per cent of their real financial wealth by the age of 90. And that is not counting property.

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One particularly important observation is how wealth changes in later life. The report shows that, from age 84 to 91, median financial assets remained fairly level. This exposes the strongly held myth of U-shaped or J-shaped spending patterns in retirement.

Just six per cent faced costs for medical treatment outside the NHS in their last year of life. Only seven per cent received assistance with daily activities from a privately paid employee in the run-up to death. Some 21 per cent 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.

And 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.

But few of these moves were for financial reasons, and only one in five ended up selling before age 90 without buying another. For those aged 80 and over, an average of £49,000 was released in downsizing.So retirees are not spending as much as they could.

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A vital part of a planner’s job is to help clients work out a withdrawal framework that is not only sustainable but also provides maximum spending. We need to ensure we help retirees spend confidently.

For years, the industry has indoctrinated retirees into thinking their cost of living in later life is to go through the roof. I will wager this may be one reason they are overly cautious about spending their hard-earned wealth. But life is for living and they need to be reminded they can’t take it with them when they go.

Abraham Okusanya is director of Finalytiq



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Great article Abraham. There’s a huge opportunity for advisers to actively manage income levels with clients rather than fall back on simple approaches such as the 4% rule (or whatever other number is the current favourite). These rules give confidence of not running out of money but inevitably will leave a lot of money on the table for many if followed slavishly. A more dynamic approach to spending is needed.

  2. The report is based on behaviour between 2002 and 2015. The landscape is significantly different now.

    An advisers only obligation is to help a client plan their finances in their individual situation. They have no responsibility for encouraging reckless spending.

    Can you imagine 5 years down the line what the FCA would say if a suitability report said “I recommmend you take a lump sum from your pension for an Audi R8, you’ve always wanted one”? Something tells me that wouldn’t be compliant.

  3. Surely Advisers should aim to ensure that customers are able to achieve their objectives.

    If leaving money to the family is their main concern, then the Advisers role is to facilitate that.

  4. Sounds to me that advisers may be doing a good job – encouraging clients to spend other assets first as part of a sensible IHT mitigation strategy.

  5. I can be considered a retiree. I certainly am not in draw down, my wife and I both bought joint life annuities. We have quite sufficient equity exposure with our ISAs, shares and bonds.

    I can only say that if any adviser had told me to get spending they would have been shown the door so fast their feet wouldn’t have touched the ground. We worked jolly hard for what we have and had a fairly impecunious youth. It is far better to be skint when young that when old. We certainly don’t want our money to run out before we do and in the meanwhile we live fairly comfortably, manage to put a bit by and hopefully are prepared for emergencies and the forthcoming Brexit catastrophe.

    • Hi Harry, once clients have a secure level of income to meet their essential needs, I do believe it is incumbent on us to show them how much they are likely to die still owning and if they have no dependants, then periodically encourage them to treat themselves with their own money, often quite substantially.

      The above is particualrly important in early retirement which is often when people have the health and money to do some of those things they always dreamed of (their bucket list). Showing them visibly how much they might still have when they die at say 95 or 100 and the effects of spending an extra say 5k on holidays a year between 60 and 70 without the (realistic) fear of running out before then is where I think we can truly add value as advisers.
      Money is there for a purpose….. to be spent on living, not hoarded until dying.

  6. People don’t spend if they are unsure of the future. For instance, the Government added 7 years to my retirement age so I can’t even trust my own rulers. In a democracy you would have thought the raising of the state pension ages would have been openly discussed and the individuals notified . If women born in the 1950s were now allowed to retire as they had thought, there would have been a lot more spending on the high streets of Britain.

    • Well said Alison. As one can’t trust the idiots in Westminster it behoves those who don’t have continuing earnings from employment to husband their assets carefully.

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