Woman walking across a suspended walkway

The psychology of spending money in retirement

Although it’s traditional to see the move from work to retirement as something to celebrate, it can also be a challenging time.

You’ll be going from being in work, with all the disciplines and structures involved with a full-time job, to a life where all your time is your own.

Furthermore, even if you make a gradual transition into retirement, there will eventually come a time when your income will derive solely from your accrued pension fund and other savings, rather than from a regular income every month.

Because of this, it’s important to plan ahead and to be aware of the potential challenges you may face moving from work to free time. Not only in terms of the “pounds and pence” details of how much income you will have available, but, perhaps more importantly, how your approach to spending money could change.

Dealing with the transition from accumulating to spending

From a financial planning perspective, I see your financial journey as a two-stage process.

First there is the accumulation phase while you are working. During this time, you are building your wealth and growing the value of your pension pot, and other savings and investments.

This is followed by a period of decumulation from when you finally stop working and on through the rest of your life. Unless you have income from rental properties, you’re unlikely to have any more earnings, so will be living on the value of the assets you have accumulated and the growth you enjoy on your investments.

It takes a big psychological adjustment to go from accumulating wealth and having a monthly salary going into your bank account to then turning that tap off and starting to spend what you have built up.

It’s a big change that many people often struggle with. Some to such an extent that they hold back on spending their accumulated wealth through fear of running out.

The fear of market turmoil

One of the biggest potential issues to deal with is the understandable belief that your retirement fund is a finite amount.

Your caution may result in you drawing less than you might need to live comfortably.

That belief can also heighten your concern about a significant market downturn affecting the value of your assets, instilling a fear that there is no chance to replenish your fund.

A key part of your retirement plan will involve recognising the required investment returns needed to maintain a sustainable level of income to ensure you don’t outlive your fund.

You need to bear in mind that your retirement could last 20 years or more. Consequently, you need an effective strategy that makes full use of the flexibility offered by Pension Freedoms. This could help you find the right mix of investment alongside guaranteed income.

It’s also important to remember that historically markets typically recover after periods of turbulence, and – in the long term – investing may be a better way to grow your money than putting it in a cash savings account.

The challenge of deciding how much retirement income you need

When it comes to drawing income from your accumulated pension fund, you have to balance two conflicting emotions.

On the one hand there’s the fear that you could outlive your savings. As a result, you may well underestimate what you can comfortably spend in retirement.

Against that, however, is the alternative point of view that says that “No one wants to be the richest person in the graveyard” or, more succinctly, “You can’t take it with you”.

Any reticence to spend money in retirement may also be driven by concerns over your legacy. This could result in you prioritising the wealth you pass on to your beneficiaries above your own needs.

This is understandable. Yet, in my experience, beneficiaries are far more likely to want you to put your own comfort and quality of life above any potential inheritance they may receive.

Phasing your retirement can help you adapt

If you’re facing any key life change, it can sometimes help to ease into it gradually, or have a trial period before committing wholeheartedly to a new chapter.

Again, the flexibility offered by Pension Freedoms can really help you. Ultimately, you have the ability to structure your retirement income in order to phase your retirement over a period of time that suits you.

This means you can look to work reduced hours, or a take a job with fewer responsibilities, and supplement your income from your pension fund to ensure you don’t experience any reduction in your standard of living.

Taking a phased approach to retirement can also help from a psychological point of view. Your retirement may be easier to manage if it is less of a cliff-edge drop and more of a gradual slope down. In this way retirement may feel like a natural progression rather than a big upheaval.

Modelling your financial future

Being able to envisage your future and see this in a chart might also help you to overcome some of the concerns you may have about the potential to overspend your wealth once you’ve retired.

Using cashflow modelling you can help you plan ahead. It can show you the effects certain financial events – both personal and external – may have on your wealth, giving you peace of mind to be able to live and spend more freely in retirement knowing you will be “OK”.

In fact, “Will I be OK?” is the big question everyone wants answered when it comes to looking at your financial future.

With careful income planning, an effective investment strategy, and regular reviews, the answer to that question could be a resounding “Yes!”.

Read more: The one financial question you need the answer to

Read more: How cashflow forecasting can help you plan your financial future

Get in touch

If you’d like to talk through any of the issues you’ve read about here, then please get in touch.

You can call me on 07769 156 250.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

These investments do not include the same security of capital which is afforded with a deposit account