As we approach the school summer holiday period it seems a very good time to look at how clients tend to manage their holiday spending.
Here’s a typical example: the holiday is booked within budget, then they go away. They may have an allocation of holiday spending money but then what happens? It rains all day so they find themselves spending money at the places where they go to avoid the weather. Or the weather is brilliant and they spend more on drinks and ice cream than they intended. Then there is that souvenir that must be bought to remind them of a wonderful holiday. After the holidays they arrive home and surprise, surprise find they’ve spent more than they intended.
One way of getting back on track is to cut down on post-holiday spending. It may not be so obvious after the summer holidays, because they are more staggered, but after Christmas each year I notice that local restaurants are less full on Friday and Saturday evenings but the queue at the takeaway is longer.
But, what about when the client retires? The Alice Cooper song lyric goes, ‘School’s out for summer, but at retirement, ‘Work’s out forever’. This means that there is no post-holiday period to get back on track, and each overspend aggregates on previous overspends. When does it come to a head?
Before answering that question we need to factor into the equation that income in retirement is usually a lot less than income while working. Especially if retirement commences before the State pension kicks in. This can be partially offset by the fact there are no commuting costs, plus other costs associated with working no longer apply. That long holiday has just begun on a lower income.
How clients react to reductions in income is interesting. If work unexpectedly comes to an end, generally they immediately cut back on unnecessary spending. But over a matter of a few weeks they can quickly revert to their habitual spending. It is only those who experience regular shocks to their income who seem able to manage downturns in income.
Retirement presents a shock to income that few are experienced to manage. It takes a period of time, possibly several years, for them to adapt their spending to the new income level. During this period they could be overspending, with the result that the retirement investments they have will either deplete faster, meaning less income for the remainder of their life, or they are accumulating debts.
Recently I saw a comment from a financial adviser on social media saying they did not want someone who would ‘overspend’ in retirement as a customer. They called them an ‘insistent customer of the worse kind’.
While the adviser may control what income is drawn from the investment portfolio, they will not be able to control the client’s spending. Surely it is better to work with a client knowing that their spending will be erratic, than face the shock of them paying high interest rates for credit that is unknown to you, until it is revealed at a review meeting?
Why am I writing about overspending in retirement when the Institute of Fiscal Studies (IFS) finds from its analysis of the English Longitudinal Study of ageing – ‘End of Life Data’ – that most pensioners could afford to draw more income from their wealth?
In retirement we concentrate on pension savings and investments but not on housing wealth. Yet the IFS observe that at death 58% of individuals were owner-occupiers and 45% had private pensions. The generation this covers would have been those who benefited from defined benefit pensions or purchased annuities on retirement.
The IFS argument is that many pensioners could afford to draw down more of their wealth in retirement if they include housing wealth in their calculations. How often is the residential home considered when putting together an initial retirement income strategy?
At what stage does it begin to be considered? When the individual has to make a decision about downsizing or a lifetime mortgage due to the debts they have accumulated? I don’t believe such an approach is in the best interests of the consumer.
While the general client attitude may be that, ‘I will live off my pensions and investments and leave the house to the children’, for many this is not a solution. Too many have insufficient pension wealth for this to be viable. For them housing wealth will have to be a major factor in their retirement income planning.
How a client gets their finances back on track after a summer holiday overspend gives a clue as to how they will manage their retirement spending. Many should not overlook their housing wealth, as increasingly this will have to form a major part of their retirement income.
Bob Champion is chairman of the Later Life Academy (LLA)