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How flexible is spending in retirement?


For financial professionals only

It is common practice for financial advisers to draw a distinction between ‘core’ and ‘discretionary expenditure’. The idea is that IF a client’s portfolio falls in value, they MIGHT be able to reduce their outgoings by cutting down on discretionary spending. This seems a less painful way to avoid the impairment in income security that everyone is so rightly worried by. It sort of makes sense – in theory.

However, I see two potential flaws with relying on this as an underpin in a recommendation. First, if you see retirement as split between a more active early phase and a slower second half, who wants to retrench as soon as they have stepped away from work? And who wants any threat to lifestyle later? Your clients can sensibly expect to be spending 15% less at 80 than they do at 65, but after 80, who wants a serious shock to their lifestyle when they are elderly or their annual highlight is buying the kids presents at Christmas?

Second, where’s the evidence on retirement spending that shows people really do have enough discretionary spending to give that flexibility?

A search of ONS data shows the following analysis of splits in spending by income quintile for retired households. (Table A55).

ONS data - table 55

This analysis is from 2016-2018 so the spending totals will be a little out of date, and of course lockdown will have done all sorts of things to our national spending habits.

That said, it shows that everyone’s ‘lifestyle’ is made up of very similar components, and in similar proportions. If my portfolio withdrawals need to come down by a serious fraction (say more than 10%) because I hit bad markets early on in retirement, I’ll change my supermarket, car brand, favourite pub, discover Devon rather than the Dordogne, drop the en primeur for Aussie red, and swap Pringle for Primark. Savings will need to be made right across the board.

There is another reason why I find these ONS numbers so interesting and possibly useful to advisers. We all know our PROD requirements for segmentation, and the need to build propositions aimed at defined customer groups. This could be a really useful building block in that process. Evaluating these spending figures against details of a client’s secure income, their invested wealth, property assets and debt, gives you a view of the lifestyle you think that they can enjoy. For example, it seems to me that a couple, both with full State Pensions, still need £1m in shared retirement assets to put themselves in the company of the top 20%. Having an additional £5,000 a year above your State Pension in retirement, means you are averagely well off.

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