Why aren’t you spending more?

One of the Gods of Retirement Planning, David Blanchett, has been particularly busy in 2021. Along with a group of American financial planners, I was fortunate enough to enjoy an audience with him earlier in the week, and he has also published another ground-breaking paper.

In his paper, Blanchett explains that we don’t spend as much as we should during retirement. If we followed a logical path, when we died, there would be no money left in our bank accounts, deposit accounts, investments and pensions, and we’d have borrowed the maximum we could against the value of our property. After all, you can’t take it with you! He concedes that most of us want to leave something in our wills to our families, but if we were logical, we would simply give that money away during our lifetimes. It’s true that we should also have cash set aside for emergencies, but the amounts people leave in their estates on death is way more than they need for this purpose.

The study, which Blanchett conducted, looked at whether people had enough capital and income for the rest of their retirements, at various ages. The study looked at several different cohorts of retirees. It found that, as we got older, we were much more likely to have sufficient capital and income to fund our spending needs for the rest of our lifetimes. An increasing percentage of retirees have more than enough as they get older.

Importantly, he noted that retirees’ expenditure increases, on average, by about 2% per year less than inflation. If the UK government hits its inflation target of 2%, then the average retiree would spend the same amount every year in nominal (not inflation adjusted) terms.

Blanchett has looked at why this might be. It turns out that human behaviour isn’t 100% logical! This may come as a surprise to many economic theorists, but, I’m pleased to say, not to Blanchett.

His study shows that we aren’t rational in several important ways when we retire:

  • The psychological switch from saving to spending is very difficult for us to cope with. After a working life of ensuring that our savings, investments and pensions are increasing in value, we just can’t get used to the idea that, once we are retired, we should be spending our capital.
  • We worry too much about running out of money in retirement. In particular, we tend to assume the worst about certain risks in retirement. I see this regularly in my conversations with retirees, particularly with regard to the potential cost of care (“what if we both need ten years of care at £80,000 per year…”).
  • We overestimate life expectancy. When I say “we”, I would include financial planners, like me, who run their forecasts, generally to the age of 100. And many retirees work on the assumption that they will live far longer than average. It is true, by the way, that clients of financial planners live longer than the population at large!

His conclusion is that retirees could be spending more than they do. He says that there’s no point in having more money than you need, so it makes sense to increase your spending, or to retire sooner than you thought you could. We should try to recognise the biases in our thinking that make us more careful than we need to be.

This has been exacerbated by the last couple of years of enforced underspending, combined with some surprisingly good returns from investment portfolios.

So, you have it from one of the Gods of Retirement Planning that you can increase your spending. I’m going to spend the weekend trying to explain to my Dad that it’s logical for him to splash out on a new carbon-frame bike for his son for his birthday!

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

Past performance is not a reliable indicator of future performance.

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