Don’t penny-pinch your way through retirement. You can’t take it with you.

28 Aug Don’t penny-pinch your way through retirement. You can’t take it with you.

It is often said that the ideal retirement is one in which you spend your last penny on your last day on earth and the undertaker cheque bounces. But according to recent research by the Institute of Fiscal Studies (IFS), many retirees are not spending as much as they should in retirement.

The research notes that based on the current spending pattern of retirees, an average 65-year-old would only deplete 30% of their overall wealth by the age of 90. This means that, barring a significant end-of-life cost, most retirees would pass on a substantial part of their wealth to the next generation.

The report notes that ‘this suggests that, unless there are large costs at the end of life, the majority of financial wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending.’

When Pension Freedoms were introduced in 2015, the Government’s concern was that people would deplete their pension fund far too quickly. Indeed, the pension minister at the time is on record suggesting that retirees might spend their pension pots on Lamborghinis! As in turns out, retirees are doing the exact opposite of that!

It is a little puzzling why retirees appear to be hanging on to as much of their wealth, after all, as the saying goes, you can’t take it with you when you go!

One reason might just be that retirees are worried about their changes of living too long. Recent healthcare advances mean that we are all living longer than our parents did. So, it is entirely plausible that retirees are merely hedging the risk of living too long by spending conservatively. However, the report notes that retirees may have unrealistic expectations about their chances of survival, which is leading to an over-reluctance to spend.

Another reason may be the fear of care costs in later life. According to the company ‘Paying for Care,’ a report by healthcare specialists Laing & Buisson states that care homes can cost an average of £29,270 per year for a residential care home or £39,300 per year if nursing is required, depending on where you live.

The third reason is the desire to leave a legacy. Many retirees are worried about the financial prospects of their children and grandchildren. There is a general acknowledgement that it is much harder to get on the property ladder these days, no thanks to the increasing gap between wages and property prices.

Whatever the reason, it is important to remember that life is for living! Having a robust financial plan in place can help you find the right balance between appropriate retirement spending, the ability to cover care costs in later life and the desire to leave a legacy.

It is important to get the balance right balance between these competing demands. Failure to do so may result in penny-pitching your way through retirement unnecessarily and dying with too much money and the ensuing inheritance tax implications.

A good financial planner will help you work through these issues, creating a plan based on your unique circumstances and enable you to enjoy your retirement with confidence.