Psychology of retirement
UK adults will spend around 40 years of their lives working, and hopefully, be thinking about how best to save their money for even longer.
Over the course of that time, their savings habits will fluctuate significantly, often bringing additional pressures and requiring the use of different saving muscles. For example, those shorter-term or smaller goals may well be met with relative ease, while bigger spends might involve carrying long-term debt such as a mortgage that have to be managed for a significant duration.
That means that, by the time it’s time to stop working, clients can find it incredibly difficult to unlearn those saving habits established over a lifetime and pivot to a proactive decumulation strategy. The ability and willingness of advisers to help clients adjust to this new perspective is pivotal to making this transition as painless as possible.
The spending struggle
Making that switch to spending can feel jarring. For those that are particularly engaged in their finances, money provides resilience. But then having successfully built up their wealth over their working life, they have to move to watching it slowly but steadily being eroded. It can be quite traumatic, often compelling them to needlessly contract spending quickly.
With limited or no money coming in, even relatively modest outlays, a holiday or a new car can seem overly indulgent and excessive. This can be exacerbated by direct or indirect familial pressure, with retirees spending more readily often being the recipient of jibes about a diminishing inheritance and wasteful purchases. Whether in jest or otherwise, this can often prompt spending that is perfectly in line with budgeting being pared back.
Understanding the journey
By helping clients navigate the transition and find that freedom to spend, advisers have the opportunity to really demonstrate value, not just to clients, but to the next generation as well, more firmly embedding themselves at the heart of true generational financial planning.
Part of doing this successfully is helping clients and their families understand the different phases of retirement. Breaking down expected spending patterns and behaviour shifts across each phase can help build confidence about the inbuilt resilience of their financial plan. It can also help demystify the process and assumptions for the wider family.
Typically, these three phases are:
- The Go-Go: The earlier years of retirement where people are most active. It’s here that we tend to see those bigger spends on leisure/ travel etc
- The Slow-Go: While still active, people typically slow down a bit, taking fewer trips, spending time more locally. Bigger purchases tend to reduce in frequency during this period
- The No-Go: Physical abilities diminish, meaning that there’s often a greater reliance on support from care-givers. Spending may not necessarily reduce, but simply shift to care and health needs
Managing mindset
Each periodic shift in retirement requires a mindset shift. So while pretty straightforward to understand in theory, the transition can be trickier in practice. Here, the benefit of regular touchpoints with clients cannot be overstated. Whether it’s being on hand to answer any worries, sharing regular budgeting reminders, or offering observations about spending trends - clients and their families take huge comfort in knowing not just that there is a plan, but that it is also being adhered to properly.
Technology is a key tool in these discussions. Advisers have at their fingertips a host of digital innovations in financial monitoring and mapping, enabling them to deliver truly holistic insight into affordable lifestyle and expenditure. Being able to regularly track spending against agreed ‘spending targets’ can help build clients’ confidence in their ability to wind down their wealth without leaving them exposed.
For clients with partners, it is wisest to make sure that they too are also fully aware of the planning, financial headroom, and any potential bumps in the road ahead. In fact, for those couples retiring at different times especially, they may benefit hugely from joint financial planning. Carrying out joint reviews to help ensure everyone is confident about the financial parameters of the household.
A crucial part of solving this challenge is making sure that wider family members understand the situation and the plan. While this can sometimes mean having hard conversations with family members, it is vital that partners/children are aware of wishes and have a grasp on household finances. Part of this is also making sure that all documentation, passwords, and provider details are accessible, so that others can take on responsibility with ease as and when required.
Invaluable expertise
The prospect and reality of retirement can be extremely daunting. But in a world increasingly dominated by algorithms, chat bots, and automated advice, there is simply no better alternative to an adviser that truly knows a client and their family.
By successfully anticipating the challenges, communicating plans, and helping behavioural adjustment will enable clients to truly reap the reward of a lifetime’s hard work.