The reality of retirement
Most people perceive their retirement as a time of freedom and relaxation. Whether it’s travelling the world, discovering new hobbies, or spending more time with loved ones, people tend to envision this stage of their lives as a time for doing all the things they’d like to do at their own leisure. However, underpinning all of these dreams is a critical factor: money.
Planning finances for retirement is complex, especially with increasing life expectancy. How much should someone budget per year, and up to what age? Should spending remain consistent, decrease, or is there room for indulgence? The answers are not always straightforward - and reality often doesn’t align with expectations.
The perception of retirement
Spending expectations
Many people assume that their retirement spending will mirror or slightly fall below their working-life expenditures. Essentials like food, bills, and healthcare are expected to stay relatively stable. Planning is common; in fact, 67% of individuals aged 60-64 have actively researched how much they’ll need to retire comfortably.
However, not everyone is in a financial position to save. Among those aged 50-59, 59% admit they can't save enough due to the ongoing cost-of-living pressures. Still, the dream persists - most expect to enjoy their leisure time more, particularly through travel and hobbies.
Living arrangements
There’s a general belief that retirement should be mortgage-free. Despite this, over half (53%) of people aged 50-59 still have 5-10 years left on their mortgage. For renters, the expectation is continued renting throughout retirement, with few anticipating any reduction in housing costs.
Leisure and lifestyle
Retirement is expected to bring more time for enjoyment. Over a third (34%) of those aged 65 and over plan to use their savings on travel. There’s also an expectation of having more time, money and flexibility to eat out, exercise, and treat loved ones.
Debt and major purchases
While retirees typically expect to use credit cards sparingly and avoid large purchases, some do have specific plans. Notably, 14% of those aged 60-64 plan to buy their dream car. For some, using finance products for better vehicles is seen as a sensible decision, provided it's manageable.
Unexpected spending increases
For many retirees, spending doesn’t decrease - it rises. Nearly half (48%) report a more than 10% increase in total annual expenditure post-retirement, with 18% seeing their spending spike by over 50%. Essentials, too, cost more than expected. 40% have spent at least 10% more on basics than they did before retirement.
Discretionary spending follows a similar trend. More than half (54%) of retirees report increased spending on non-essential items, with almost a third (31%) increasing it by over 50%.
Housing costs aren’t always lower
Some do manage to reduce housing costs. More than a third (35%) of retirees cut their mortgage spend by over 10%. However, this isn’t universal - 31% saw mortgage payments rise, and 34% saw no change. Renters have been hit especially hard, with 45% experiencing at least a 10% rent hike within the first year of retirement and 36% facing a staggering increase of over 50%.
For those who retire with a mortgage, the average outstanding debt is £38,000. On top of this, nearly two-thirds of retirees (63%) had to dip into their pension to pay it down, emphasising the financial challenges that can still be prevalent in retirement.
The fun stuff - but at a cost
While retirees do prioritise travel and lifestyle upgrades, the financial reality is mixed. A majority (54%) spent at least 10% more on holidays, and 47% increased holiday spend by over 50%. However, 41% had to reduce their holiday spending.
Dining out and recreation are popular as half of retirees now spend more at restaurants, and 51% increased their recreational spend. Gifting is also prevalent, with 51% spending at least 10% more on jewellery after retiring.
Debt and financial shifts
Debt doesn't vanish with retirement. In fact, 42% of retirees report increased credit card use, while only 30% have been able to cut back. Car finance spending is another area where change is evident; 33% experienced a 50% or greater shift in their annual car finance costs after retiring.
Conclusion
As life expectancy continues to climb, retirement planning becomes increasingly complicated. Despite careful budgeting and hopeful expectations, many retirees find that the cost of living in retirement is higher than anticipated. Debt remains an issue, and essential costs - especially housing - can quickly eat into savings.
To navigate these uncertainties, planning and advice can be invaluable. With proper planning and professional guidance, retirees can build flexibility into their budgets, helping them prepare for the unexpected and enjoy the retirement they’ve always envisioned, with fewer financial surprises.
Source:
Figures used in this article are from LBG 2023 Retired Base 1, internal data.