When 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.
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.
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.
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