The big retirement switch: saving to spending

Retirement is more than not working. It’s a massive change to your way of life; and saving is a way to get there. Stressful for some, blissful for others. We all worry about money at some stage – but if you can understand your finances and the way they impact your wellbeing, you’ll have a better chance of managing the emotional part of the transition.

Managing your emotions

You work hard, you save hard. You look forward to spending time with people you love, doing things you love. You see adverts for cruise lines, with retirees cackling in their champagne sunsets.

So why do 28% of retirees get depression?

Is it all a big lie?

That research goes on to say, “Depression is more frequent in retirees, with mandatory retirement, retirement due to illness, and anticipated retirement presenting higher levels of this disease.”

Sobering stuff.

At First Wealth we guide, advise, and steer people towards retirement every day. And what we see is that, yes, it’s a big change. Yes, more people are sliding into retirement – phasing work down – rather than stopping abruptly. And yes, it can bring emotional challenges you didn’t expect.

But getting a more well-rounded view of your money ahead of time – moving from accumulating to decumulating – from retirement saving to spending – can help you manage those emotions more effectively.

Making the switch from retirement saving

We can’t tell you what retirement was like 2,500 years ago. Though, we can assume annuity rates were low down on the worry list… But the Chinese philosopher Lao Tzu, who lived around then, said: “The journey of a thousand miles begins with one step.”

It’s a useful idea for retiring saving – though unintended – because breaking a big task into more manageable sections is always going to help. Business gurus call this ‘task decomposition’…

So, you could think of retiring as a series of small tasks.

The retirement list

You’ve got the pre-retirement stage. This is where you make necessary changes to your life – and your wealth – so that the transition is smoother. This might include moving home, and even downsizing.

We work with clients on the right financial plan –and this includes thinking about what matters most to you in life: I want to achieve this by such-and-such a date. Writing a memoir, charity work, refurbing the new house. There are plenty of options.

Next is the retirement itself. The day you retire is something to mark – or celebrate. Whether you stop work abruptly, or phase down, marking the moment will help you think about what it really means for you, and manage it better.

We probably all know someone elderly who doesn’t want to celebrate birthdays or make a fuss. The problem is that life can be a long, unbroken march. Often a lonely one. Stopping to mark or celebrate occasions helps you break life up into those manageable chunks.

Finally, you have the honeymoon phase – “wow, all this free time” – followed by disenchantment – “is this it?” – and then (hopefully) a sense of reorientation and stability – “I can do this.”

Retirement saving to spending

You can be good at saving but awful at spending. And vice versa. It’s a different skillset for each.

Every person is different in this way, but a typical approach to saving and spending is:

• Early on, save into assets that evidence says have the best chance of growing your money over time;
• before retirement, move towards realising investment gains;
• at and in retirement, give yourself the income you need, while preserving the wealth you want to keep (or pass on).

Overall, regardless of your net worth, the biggest question most people ask is, “do I have enough?”

So, do you?

We can’t answer that here – after all, that’s what decades of planning are for – but we will say that no one seems to talk about being over cautious – an attitude we see time and time again.

In other words, people become accustomed to saving at all points. But why save if you don’t go on and spend it?

What you could do to is simply recognise you need a different mindset. You’ve not only moved from saving to spending – but also from graft to enjoyment.

And it’s good – as a we’ve said before – to create a plan which identifies where you get the most enjoyment. It’s those manageable chunks again.

Funding the spending

The usual approach is several pots of money that, in aggregate, pay an income rising with inflation – ideally without you having to dip into your capital too much.

Again, everyone’s different, but a few things come into play here.

You’ll probably have a private pension and / or a workplace pension. You can draw an income from the pension fund itself or buy an annuity – a separate product that pays you a guaranteed income. There are different types of the latter – some pay a fixed income, some a rising income – and they depend largely on the rate paid by government bonds.

Then, as a high net worth individual, there’s your investment portfolio – which will have income-paying assets, like government bonds, corporate bonds and dividend-paying equities.

You’ve also got the state pension. If you’ve paid enough national insurance contributions, the current state pension rate is £221.20 a week. Not to be sniffed at.

Add in all sorts of other options and there’s plenty of flexibility about funding that retirement saving-to-spending transition.

If you’re thinking about retirement, and how to allocate your net worth to both enjoy your time and leave a legacy, do please get in touch and ask about our services on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7551681/

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.