Financial planners and money coaches say a growing number of retired couples who spent decades saving hard are now unable to bring themselves to spend the money once they finally reach retirement. Instead of world cruises or theatre trips with the grandchildren, many are sitting on savings they are too anxious to touch.
About one in four people expect they will be reluctant to dip into their retirement savings, according to research by financial firm Aegon. Experts warn this caution can be a costly mistake, as retirees risk missing out on the lifestyle they saved for, and a large share of unspent money can end up going to the taxman instead of being enjoyed.
Charlotte Wheeler, of JP Morgan Personal Investing, said many clients in their 80s and 90s have significant sums of money they have never had the confidence to spend. "One of the biggest dangers is getting to that age and realising you have been too conservative," she said.
Working out how far your pot will stretch
Retirement coach Ian Shadrack said one of the biggest barriers to spending in later life is the fear of running out of cash. Official figures suggest at least 15 million Britons are currently under-saving for retirement, making that fear a natural one.
A financial planner can typically map out how long a person's savings will last by listing expected outgoings such as utilities, council tax, car payments and groceries, before setting an annual budget for discretionary spending.
Those doing the sums themselves need to factor in annual inflation, the growth of invested funds, any dividends received and the state pension. The Retirement Living Standards from Pensions UK, a benchmark widely used across the pensions industry, suggest a couple needs a post-tax income of £45,400 a year for a moderate lifestyle, covering a fortnight in the Mediterranean, one weekend break and a three-year-old car. A more comfortable retirement, including a fortnight away plus three long weekend breaks, requires £62,700.
As a rule of thumb, retirees should withdraw no more than 4 per cent of an invested pension pot each year to avoid running out of money. A couple who both receive the state pension, currently worth £12,547 a year each, would need a further combined income of nearly £20,304 for a modest lifestyle, meaning their combined pension pots should total £507,620.
Picturing the retirement you want
Once savers know how far their money will stretch, Wheeler said the next step is deciding what kind of retirement they actually want. "Take a step back and think, 'What does retirement look like for me?'" she said. "Sometimes people say they want to visit family regularly, some are happy staying around the house, others want to play golf."
Travel is a priority for many, and often best enjoyed in the first decade or two after giving up work.
Paul Hammond, a retirement coach at Panthera Life, suggests picking a top five destinations and building a three-to-five-year "hit list." He said some people prioritise getting their house in order first, such as paying off the mortgage or changing the car, but should not overlook smaller pleasures like theatre trips and days out.
Some retirees may also want to make financial gifts to their children. Hammond said it can be better to give money while children are in their 20s or 30s, when they may need it most, rather than waiting to leave it in a will. Estates left to family can otherwise face inheritance tax of 40 per cent if a couple's combined estate is worth more than £650,000, or £1 million if a home is left to a direct descendant. Gifts must be made at least seven years before death to be fully free of inheritance tax.
Turning the budget into spending
Once a lifestyle is mapped out, retirees can cost each activity, such as £300 for a theatre trip with a meal and transport every other month, or £3,000 for an annual two-week trip to Spain, to see how much of their budget is left over to spend.
Hammond suggests focusing on one goal for the year, such as landscaping the garden, or breaking a budget down month by month. For example, £10,000 set aside for enjoyable activities over a year could become £2,500 every three months. He tells clients to write their spending goal, such as £3,000 by the end of the year, on the fridge, and to put it towards coffee dates, dinners or the theatre.
"It's about breaking down the money and allocating it," Hammond said. "People plan so much for their retirement day but actually the mission is to spend your cash."
Splitting pensions and Isas
Keeping a pension strictly for everyday living costs can help retirees feel more secure, while using other savings, such as an Isa, as spending money for treats, Shadrack said.
For example, a retiree with £500,000 in a pension at age 65 might also hold a £100,000 Isa pot that can fund dream activities such as long-haul holidays or golf. Withdrawals from an Isa are free of income tax, though savers still need to pace themselves to avoid running out of travel money in the first five years of retirement.
Giving yourself permission to spend
Hammond described two clients, a professional couple in their late 50s he named Darren and Sarah, whose names have been changed, who remained instinctively cautious about their upcoming retirement even though he knew they had more than enough to fund the lifestyle they wanted.
During one session, Hammond mentioned that two long-standing clients of his had recently died, which he said "shifted" something in the couple. Within weeks, they had added an extra city break to their plans, booked a trip to Australia and decided to speed up their phased retirement.
"The numbers hadn't changed," Hammond said. "What changed was their sense of permission."
Shadrack said reluctance to spend is often made worse when people save aggressively in the run-up to retirement, cutting back sharply beforehand. "Suddenly, when they have retired, they are not in the habit of eating out and then they see the prices," he said.
Experts advise budgeting properly for all expected costs before spending begins, so that retirees are not caught out later in life or left unable to cover expensive care fees.
