11/12/19Are your spending habits putting your retirement at risk?

Do you often find yourself dipping into savings or other sources to supplement your income? Figures suggest over a third of those aged over 55 are living beyond their means. If that sounds like you, it could place the retirement you’ve been looking forward to at risk.

Whether you’re still working or are already retired, you’re likely to have plans you want to turn into a reality. That may be having more free time to spend with grandchildren or indulging in hobbies. But the spending decisions you make now could have an impact on the future.

According to the research:

• 35% of over-55s said their expenditure exceeds their income
• When there’s a shortfall, solutions include dipping into cash savings (68%), using a bank overdraft (17%) or borrowing on a credit card (16%)
• 48% said they don’t have enough cash savings to cover an unexpected bill of £5,000

Financial insecurity in retirement

The figures are part of a trend towards greater financial insecurity later in life. There are several factors that are driving this movement.

First, we’re living longer and that means pensions have to stretch even further. It’s not uncommon for people to spend 30 or even 40 years in retirement today. It may mean planned annual expenditure is no longer feasible when you consider how life expectancy has changed.

On top of this, Pension Freedoms mean the average retiree now has to take far more responsibility for their retirement income than in the past. Retirees no longer have to purchase an Annuity with pension savings. Instead, they can choose to access them flexibly or take lump sums. This has led to millions of pensioners controlling their income, some of which may be taking too much.

The impact of overspending now

Whether you’re planning to take out a loan to renovate your home or are using credit cards to supplement income, it’s important to look at the impact it could have on future plans. Whilst expenditure will often decrease in retirement, your income will likely fall too. Managing your spending now can help ensure you’re able to achieve the retirement you want.

Overspending as you approach retirement could mean your plans are placed at risk:

• Retiring with debt: Spending on credit cards or taking out a loan can seem like a simple solution for making purchases that you don’t have the money for right now. However, without a clear repayment plan in mind, you might find you still have some debt at retirement. Without an income from work, it can be difficult to reduce this quickly and you could end up paying far more in interest than you thought. Where possible, you should plan to pay off debt before your retirement date. But keep in mind that the unexpected can happen.
• Accessing your pension early: Typically, Defined Contribution pensions are accessible from the age of 55. For many, this is before the age they plan to retire but it can be tempting to start making withdrawals. It’s a step that could help realise dreams before you retire. But, equally, it could leave you short in the future if you’ve not calculated the long-term impact of making a withdrawal early.
• Depleting savings and investments: More than two-thirds of those that admitted to living beyond their means were dipping into savings. This may be what your savings were intended for and you have enough to support you throughout retirement. Yet, it’s important to look at how depleting your savings and investments could impact your later lifestyle choices.
• Surviving on a lower income: The financial decisions made now could mean you’ll need to survive on a lower income than you expected. In some cases, a lower income will still allow you to achieve your goals.

Protecting your future

Financial planning can help you make sense of your finances now and ensure you live within your means. The process can also help you consider the long term when you make decisions about your spending.

Through discussing your plans, we can help you understand whether spending habits you have now are aligned with these. We can use cash flow modelling to visualise the impact of financial decisions. For example:

• Would accessing a tax-free lump sum from your pension at age 55 mean your retirement income is lower than anticipated?
• How would increased spending in the early years of retirement affect your later life or ability to pay for care?
• How long would your pension last for if you maintained your current spending habits?

Our goal is to help you make the right decisions, considering both the present and future. With the right information, we aim to ensure every client feels confident in the financial choices they make every day.