Retirement Planning U-turn on ‘U-shaped’ Spending

By 16th February 2017

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

A simple Google search for ‘quotes about planning’ throws up literally hundreds of results. From the greats (Abraham Lincoln, JRR Tolkien, Leo Tolstoy) to the humbly anonymous, it seems that everyone’s got a view. And it would appear to be broadly the same one – people from all walks of life consider planning to be crucial for future success. For the record, one of my favourite planning quotes comes from Warren Buffett: “Someone’s sitting in the shade today because someone planted a tree a long time ago.” A big part of our role as financial advisers is to help people plan that piece of shade for themselves and their loved ones. Organising your finances for your retirement is one of the most important pieces of planning you’ll ever undertake, so it’s important to get it right.

“Someone’s sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

A popular view among financial advisers has been that the pattern of spending in retirement is ‘U-shaped’. This means that once people retire their spending is expected to be relatively high as they are still fit and healthy (roughly between their mid-sixties and mid-seventies). Then, when they move into the next phase (mid-seventies onwards), their outgoing expenditure decreases as they age and become less active. Finally, as they move towards and through their eighties, expenditure rises again in later life due to the costs of care and support as they become more dependent and less active.

On the face of it, this seems logical and appears to accurately reflect how we live out our later years. But some research released by the International Longevity Centre UK (ILC UK) in 2015 suggests that this just isn’t the case. The ‘savings puzzle’ has been on the radar for some time – the phenomenon of older people seeming to save more and accumulate assets as they get older. The research from the ILC-UK analyses data from the Living Costs and Food Survey and the English Longitudinal Study of Ageing to understand what’s behind the expenditure habits and patterns of the senior generation.

The report – Understanding Retirement Journeys: Expectations vs reality – throws up some interesting headline findings:

  • Retirees are saving £48.7bn per year
  • Rather than spending their kids’ inheritance on holidays and leisure, older people spend decreasing amounts on non-essentials
  • On average retirees think they have a 70% chance of leaving an inheritance of £50,000 or more
  • From the age of 50 onwards, spending on most non-essential items begins a slow decline

It also finds that the U-shaped spending model doesn’t seem to be typical of the majority: “our findings suggest that typical consumption in retirement does not follow a U-shaped path – consumption does not dramatically rise at the start of retirement or pick up towards the end of life to meet long-term care related expenditures. With a buyer beware warning that their data is restricted to households and therefore doesn’t include individuals who may be living in care homes and paying for it from their own assets, the report states it can nevertheless “explore the extent to which care expenditures eat into household budgets across different ages”, adding that “even for the 80+ age group, only a minority (6.4% of households) are putting money towards meeting long-term care needs.”

The report clearly shows that spending and consumption decreases steadily throughout retirement. A household headed by someone aged 80+ spends, on average, 43% less than a household headed by a 50-year-old. This means that many older households by default continue saving throughout retirement. In fact, on average, those aged 80 and over are saving around £5,870 per year, which adds up to a total annual savings figure made by those in retirement in the UK of around £48.7bn (2.8% of GDP). The majority of savings made by older people are sitting in low-interest current accounts.

Ben Franklin, Head of Economics of Ageing at ILC-UK adds: “Our research points to evidence of a “default retirement consumption path” where consumption falls lead to savings in later life. This implies people may need a combination of flexibility and security of income in retirement to support higher consumption earlier on while ensuring people are still able to afford their regular bills in later life. Striking the right balance between flexibility and security will not be an easy task and will require financial guidance and advice throughout retirement.”

Together we build a personal retirement model that takes a holistic view of your lifestyle, complete wealth position and market projections.

In the light of the report the ILC-UK called for the introduction of a mass market mid-retirement financial health check and financial advice, at the point at which consumption typically starts to slow down (early seventies), and for the financial services industry to consider how it can help retirees maximise their returns on their resulting growing savings.

A retirement plan to match your life

Our approach at Quadrant surpasses these suggestions. From the moment we first meet a client, we aim to plan correctly for their future. Ensuring that, together, we build a personal retirement model that takes a holistic view of your lifestyle, complete wealth position and market projections. We consider all factors and eventualities in our calculations, to allow us to make the best and most comprehensive forecast with all the information available. We use lifetime cashflow modelling to visualise expenditure and investments over the long term. Then we consider possible life events and work them into the plan, like the things on your bucket list, gifting, downsizing and cost of care.

Once all factors have been taken into account, we set out your retirement plan; but this is not the end of the process. The ICL-UK report emphasises the importance of support throughout the entire period of retirement. Striking the balance between flexibility and security is crucial to a successful and comfortable retirement, and this requires constant monitoring. This is why we need to meet regularly and keep revisiting your cash-flow modelling. We aim to ensure that however your spending and saving needs develop, your retirement plan is always in step with your life.

To find out how Quadrant Group could help you plan for your retirement, please get in touch.

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This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Andrew Pereira

Director, Wealth

Andrew has been working with families, high-net-worth clients and business owners for well over 20 years.

Learn more about Andrew Pereira