There's No Glory In Modesty

“There’s no nobility in poverty. I’ve been rich and I’ve been poor, and I choose rich every time.”

Jordan Belfort (Leo di Caprio), “The Wolf Of Wall Street”

When I sit down with someone who is on the cusp of retirement, the conversation will inevitably turn towards how much that person thinks they would like to spend during the next phase of their lives.

And, almost every time, the conversation goes a little bit like this:

“So, if you were to retire tomorrow, how much do you imagine you would need to spend each month. More than that, in a dream scenario, how much would you love to be able to spend?”

“Oh well, I don’t really know. We’re not extravagant people.”

Isn’t that interesting.

We spend our working days with our nose to the grindstone, accumulating fun tokens to deploy when we hit this magic point in the future - and then when it arrives, our first thought is one of restraint. Of consciously limiting ourselves.

Now there are, of course, a couple of very good reasons for this.

As Mr Belfort (somewhat obnoxiously, and perhaps fictionally) espouses, having wealth is infinitely preferable to the alternative. And it is more than natural that when the income from the day job is switched off, folk are terrified that they will end up running out of cash.

Money is a funny thing and guilt around money, having too much or not enough, is a very real thing. It can break our brains if we think about it too much.

These behavioural biases, which we focus on so much when we think about investing, are becoming more and more important for retirees. For the traditional “guardrails” which existed around retirement spending in the past are no longer there any more. Retirees are bowling with the bumpers down.

Image credit: Shutterstock

Defined Benefit pensions are being gradually phased out. Compulsory annuitisation and restrictions on drawdown levels haven’t existed for ten years now.

This means that retirees now have to make more decisions around how they spend their money, which is great from the perspective of flexibility - but this flexibility can create a kind of paralysis. Terrified to do anything, the layman defaults to “rule of thumb” assumptions about how much they can afford to spend.

Research tells us that most folks who fund their own retirement through drawdown, underspend what they could. According to the IFS “for those born in 1939–43, almost six-in-ten (59%) saved at age 67 but this rose to almost seven-in-ten (69%) by age 75. Over the same ages, the share of income saved by that group rose from 2% to 15%.” Instead of spending as they age - people are actually saving.

What is holding them back?

I think there is something innately British about our sense of modesty around money. “Can’t be seen to have done too well”.

Money can provide many things, the most important being time and options. Having accumulated a tidy little nest egg, you now have the opportunity to deploy these resources in any way you see fit. There are no rules.

In the same way that the ones we love couldn’t care less what car we drive or what clothes we wear - I doubt very much anyone will remember on our death beds that we flew First Class instead of Economy once or twice.

The only thing that is left when we are gone is the memories people have of us. Go for the nice dinner.

None of the above is intended to constitute advice to any individual. If you have questions related to your specific position, feel free to email me at david@beechgrovefinancialplanning.co.uk - or contact another regulated financial planner.