Inflation
Sometimes people forget inflation altogether and work on a level expenditure basis throughout retirement. In most cases this is an oversight that needs correcting in their planning.
Taking this on a step, there is a view that the expenditure inflation that pensioners experience is higher than the usual CPI measures commonly adopted. In other words, the items that pensioners spend money on tend to increase in cost faster than the average basket of consumer goods.
That being said, our experience tells us that, as people progress through retirement, they tend to spend less in real terms. It is relatively rare for those individuals who draw down on pensions and investments to meet part or all of their retirement needs to ask us to reduce their level of income from one year to the next. However, it is very common that people do not increase their income need each year. The effect of this is a gradual reduction in their real income and expenditure over time.
It is hard to know how this will play out for each individual so, to ensure prudence, we tend to assume that expenditure needs continue to increase in line with RPI throughout retirement. However, in reality, this does not play out for most clients, especially as they move into their 80s and 90s.
Estimating ad-hoc expenditure
This is a common area where people will, time and time again, underestimate their needs. By the nature of this spending – buying cars, going on holiday, supporting family members – it is hard to know what will come up year-on-year.
We therefore simply encourage people to think about this in some detail – i.e. what type of car are you going to want in retirement? And how frequently will you replace it? – and apply an element of prudence.
Care cost planning
We will not go into detail in this article about care cost planning as we have other content that reflects our views and experience in that area. However, it is a topic that closely interacts with expenditure planning.
Given the difficultly in quantifying the likelihood of needing self-funded care and the quantum of the potential cost, it is often a challenging element to build into the planning.
It is certainly not something to be overlooked but we do often speak with clients on the following two points:
- The number of people that actually need to self-fund care at a high cost level is relatively low, and the average length of time spent in a high level of care need is also relatively low.
- In many cases, where there is a need to cover a high level of care cost, that will potentially coincide with the sale of the main home, which would in turn create more liquidity to cover part or all of those costs.
Conclusions
We hope that the above conveys the importance of getting your expenditure position and projections clear – it is often the area that we spend most time focusing on with clients during our early conversations with them.
If we were to finish with a single conclusion, it would be that you should always be prudent in these calculations – it is much better to settle on a plan that overestimates expenditure slightly, rather than setting unrealistic expectations that your expenditure will reduce over time.
Our financial planners and tax advisers will help you in reaching this prudent approach and building your wider plans around those expenditure goals.
Speak to our private client specialist today |
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