Years of experience have taught me that things don’t always go to plan in retirement. Many people imagine that their retirement plans will be spoiled by investment shocks and crashes, but, in fact, more mundane disasters tend to be the cause of an adverse change in your retirement plan.
Research from the USA has confirmed our experience to be the case. Wade Pfau (you will read a lot about him in my blogs) has looked into this in detail. As with any research from the USA, it’s important to remember that we are insulated by the NHS from most of the “health expenditure shocks” to which our American friends are exposed. But the other shocks affect us just as much and are capable of ruining the most carefully constructed financial plan for retirement.
The most common retirement spending shocks are:
- an unforeseen need to help other family members – usually adult children or grandchildren. The Bank of Mum and Dad can stay open in retirement, helping to cover the cost of financial, health and marital problems. It’s important to work out how your own financial position might be affected before promising to help out.
- tax changes – tax policy has been benign for retirees for the last twenty years or so, but this might not always be the case. It’s always possible that taxes could rise for pensioners, and increases in other tax, like VAT and council tax, would have an impact on retirees’ standard of living.
- housing – not only can it be costly to move home, but the cost of home repairs can have a significant impact on retirement plans.
- the care lottery. It’s true that, for the majority of people, the cost of care in later life is pretty low. However, for some, the cost can be enormous, particularly for those whose mental health declines earlier than their physical health.
Any good retirement planner will be able to help you to withstand these shocks, by adapting your plan. One thing we would recommend that you know, before you enter retirement, is what you would do if one of these predictable shocks occurred. It’s never a good idea to be working out what to do with your finances during a crisis.
Philip Wise | firstname.lastname@example.org
Managing Director and Chartered Financial Planner