This piece first appeared in the Financial Times on 1st July 2022.
He was about to retire with a guaranteed annual income of £300,000, but I had hardly poured the coffee before my client and his wife began telling me about the cutbacks they were planning.
Even after tax the couple would be earning nearly £14,000 a month, but they were fretting about running out of money. They were not extravagant — models of prudence if anything. But there lay the problem.
As the cost of living crisis grows more severe, bad news about the economy and the outlook for our personal finances appears unrelenting. Inflation is heading towards 11%, energy bills are soaring and interest rates are expected to continue their upward trajectory.
The impact on those already struggling to pay bills is serious and worsening. But among people at the higher end of the income spectrum — the top 5% of earners — there are many for whom this is more of a psychological than a financial problem. I meet a growing number of people approaching retirement who need to learn to spend — not just save — according to their means.
For much of our lives we are forced to live within a financial framework that governs our levels of expenditure and saving. Of course, we all know spendthrifts who cannot budget, or we may have occasional lapses, but most of us maintain self-restraint for four decades or more. There is little choice. Climbing the housing ladder, raising a family and building a retirement pot all require serious levels of focus and prudence.
At the point you retire you can be overwhelmed by a confluence of concerns.
First, you are about to turn off the earnings tap. This can be discomforting, no matter how wealthy you are. You are now living off your pension and savings. In adviser jargon, you have gone from the “accumulation” phase to the “decumulation” phase — instead of getting slowly richer, you face getting slowly poorer.
Then there are the stories we tell ourselves in the deep of the night, when we focus on the threats to our wealth. Today’s inflation headlines poke and prod us, reminding us of earlier times when it soared into double digits. We worry about falling markets, taxation or the potential demands of family members who really are struggling. There can be many calls on the bank of mum and dad and its branch office, the bank of gran and grandad.
Finally, there is the difficult question of longevity. When my father-in-law retired he told me he now had all the time in the world. He lived just 18 months more. None of us knows how long we have got or how many healthy years we have ahead of us. If you have a bucket list then this is the moment to pay it attention, and usually that means spending at levels that may feel relatively profligate.
With all these intangibles, how do you switch from being a conscientious saver to a carefree spender? Many do not, and they live their retirements needlessly within their resources — their dreams unfulfilled.
I would argue that you need to build a new framework — a structure designed not to contain you but to give you freedom. It needs to start with dreams, not numbers. What would you, and your partner if you have one, like to do?
The mantra for many of my clients is author Steven Covey’s phrase: “Live, love, learn and leave a legacy.” Time, not money, is often your scarcest resource, so you need to think about how you plan to prioritise spending both.
Only once you have identified your ambitions should you look at the numbers. Can you marshal your money to make your dreams happen?
A good adviser will use cash flow modelling software to look at your income and planned expenditure to see what is possible.
Music hall comedian Henry Youngman once joked: “I’ve got all the money I’ll ever need — If I die by four o’clock.” We prefer to use rather more optimistic life expectancy numbers. A cash flow model can show the impact on your wealth of you living to 100 or more and under various scenarios, like sustained high inflation or higher tax. We can punch in events like giving each of the children £50,000 towards a house deposit or needing later-life care for a prolonged time.
This can show how much is left in the pot on your death and can help reassure you that you will not run out of money.
Simpler versions of this sort of tool are becoming available online, and you can do some more basic calculations yourself with a spreadsheet.
Look through your bank and credit card bills over the past six months or year and tot up on a simple spreadsheet how you are spending today. Split this into essential spending — council tax, energy bills, supermarket bills etc. In a second column add up your discretionary spending — things like holidays, a new car and restaurant meals.
As well as giving you a sense of core expenditure needs, this should tell you what you need if things go awry. Set aside a pot for emergencies and even for later-life care, then price up your goals and dreams. This may include leaving a legacy, as well as trips around the world. You can spread some of this over 10-15 years of enhanced spending. Leave yourself some fairly generous headroom for the first five years at least. This can be when your spending is highest.
If your dreams and budget do not match then you will have to start to prioritise, but that can help you focus on what matters most to you. If you have too many options then you can spend more time picking than participating.
The challenge for many who have been fortunate enough to be able to save is not insufficient funds but matching income to planned expenditure. It is easy where your needs are satisfied from natural income — from things like your state pension, defined benefit pensions or annuities and rental income from property. When you have to eat into capital it becomes more uncomfortable.
Trust the plan. If you have calculated the numbers properly your issue should not be the fact that you are eroding capital but simply which pots you draw from first. For example, you might prioritise Isas over pensions, as savings in a pension wrapper are also protected from inheritance tax.
Having a financial plan is important, but even the best cash flow modelling is not sufficient to make some people comfortable with spending money — so try not to think of it as money. Think of it as casting a vote for the world you want to live in.
At its simplest level, this could be going to the cinema and buying a bucket of popcorn for nearly £6. It may seem an extravagance, but it enhances your pleasure of the visit and could be helping keep the cinema open. The owners probably make more profit on that treat than on the film. You are voting to keep that cinema alive in your community. Similarly, when you travel you are fulfilling your dreams and helping support jobs in the tourism industry, keeping economies alive.
It can seem like you are being financially irresponsible, and it can take time for you to adjust. But it is worth the effort. With a secure plan and a different mindset, you can pursue your passions and live a happier, fuller and probably more generous retirement.
Nathan Valbonesi is a chartered financial planner and leads the investment and wealth advice team at Weatherbys Private Bank.
The value of investments can go up and down, and you may not get back the full amount originally invested.