THE BIG QUESTIONS

Should I spend more in the early years of retirement?

A pound at 65 and a pound at 95 have the same monetary value. But they may not have the same value to your life. Spending more during the healthier, more active years of retirement can make sense — provided your long-term finances are strong enough to support it.

By Scott Gallacher · Chartered Financial Planner · Author of 50 Today 100 Tomorrow

A pound is a pound.

Whether you spend it at 65 or keep it until 95, its financial value is easy enough to understand. Allow for inflation and investment returns, and we can model what that money might be worth in the future.

But there is another kind of value that is much harder to put into a spreadsheet.

What can that pound enable you to do?

At 65, money might help fund a month travelling around Australia, a family holiday with the grandchildren, a new hobby, more rounds of golf, or simply the freedom to work less and enjoy more of your week.

At 95, the same money will still be useful. Indeed, you may need it for entirely different reasons. But there is no guarantee that all the opportunities available at 65 will still be available 30 years later.

The money may retain its monetary value.

Its life value may change considerably.

And that raises an uncomfortable retirement-planning question: are some of us saving too much of our retirement for later?

Retirement spending doesn't have to be a straight line

A great deal of retirement planning implicitly assumes that expenditure will remain relatively constant.

Work out what you need in your first year of retirement, increase that amount for inflation and project it forwards.

That is useful for modelling, but real lives rarely behave quite so neatly.

Someone who retires in good health at 65 may suddenly have something they haven't enjoyed since childhood: substantial amounts of free time.

Travel may increase. There may be more meals out, hobbies, days away and time with friends and family. Perhaps the house gets improved or the car replaced. Some people finally start doing the things they spent their working lives saying they would do “one day”.

As people get older, priorities can change. Some forms of discretionary spending may naturally reduce, while other costs may increase.

That doesn't mean everyone should assume they'll spend dramatically less later in retirement. Health, care and support costs can become significant, and none of us knows what later life will bring.

It does mean that assuming you should spend precisely the same real amount at 65, 75, 85 and 95 may be unnecessarily simplistic.

Your money is supporting a life, and that life will change.

Some opportunities have an expiry date

This is where retirement planning becomes about more than arithmetic.

Suppose you've always wanted to visit New Zealand.

At 65, you have the money, the time and the health to go. But the trip is expensive, so you decide to leave the money invested instead. Perhaps you'll go in five years.

Five years later, markets are uncertain. You postpone it again.

At 75, one of you develops a health problem that makes long-haul travel considerably less appealing.

The money is still there.

The opportunity isn't.

Of course, that won't happen to everyone. Plenty of people remain active and adventurous well into their 70s, 80s and beyond. The point isn't to impose an arbitrary age limit on anyone's life.

It is simply to recognise that money and opportunity don't necessarily age at the same rate.

Some expenditure can be deferred relatively easily. A nicer kitchen this year or next probably makes little difference.

Other spending depends on health, energy, relationships or circumstances aligning at the same moment.

The holiday with your adult children needs them to be available too. Time with grandchildren changes as they grow older. A physically demanding ambition may be easier now than in ten years. And the people with whom you hoped to share an experience won't necessarily always be there.

That's why I think retirement spending needs to consider not only what something costs, but when its value to your life may be greatest.

But spending earlier isn't automatically better

There is an obvious danger in taking this argument too far.

“Spend it while you can” might make a good slogan. It doesn't necessarily make a good retirement plan.

Someone retiring at 60 could need their money to last another 40 years. Inflation compounds. Investment markets disappoint. Tax rules change. Homes need repairing. Families need help. Later-life care may be expensive.

Spending significantly more during the first decade without understanding the consequences could create exactly the problem prudent retirement planning is designed to prevent.

So the question isn't:

“Why don't I spend more now?”

It is:

“Could I afford to spend more now without compromising the future I also want to protect?”

That distinction matters.

The purpose of planning isn't to choose your 65-year-old self over your 95-year-old self. It is to find a reasonable balance between them.

What are you protecting?

One way to approach that balance is to be clearer about what your later-life money is actually for.

Perhaps you want enough secure income to cover essential expenditure for life. You may want a substantial cash reserve, provision for unexpected costs and enough financial resilience to cope with poor investment returns.

You may want to preserve money for potential care costs or leave a particular inheritance to your children. Perhaps helping family during your lifetime matters more.

All of those are legitimate objectives.

The important thing is to make them deliberate.

There is a difference between retaining £500,000 because you have consciously decided what you want it to provide and reaching later life with £500,000 simply because you were always too nervous to spend it.

Once you've decided what needs protecting, you can begin asking a much more useful question about the rest.

What is this money for?

The strange difficulty of spending

This is often harder than it sounds.

Many people who retire with substantial assets got there because they were good at not spending money. They lived within their means, saved, invested, paid down debt and delayed gratification.

Those habits may have served them extremely well for 30 or 40 years.

Then retirement arrives and the financial instruction manual appears to reverse.

You spent your working life accumulating capital. Now you're supposed to be comfortable drawing on it.

You spent decades feeling pleased when your investments increased. Now a planned reduction in capital may be evidence that the financial plan is working exactly as intended.

That psychological transition shouldn't be underestimated.

I've sat with people who could comfortably afford a significant holiday, a new car or a gift to their children and still find the decision surprisingly difficult.

They aren't being irrational. They are applying habits that have served them well for most of their lives to a period when their circumstances may have changed.

The question is whether those habits are still serving the same purpose.

The risk of spending too little

Financial planning quite rightly spends a lot of time thinking about the danger of running out of money.

But there is another outcome that receives less attention.

You don't run out.

In fact, you never come remotely close.

You reach your later years with considerably more wealth than you expected, not because leaving that amount was particularly important to you, but because you repeatedly postponed things you could comfortably have afforded.

That isn't necessarily a successful financial outcome.

If someone genuinely wants to leave the maximum possible inheritance, wonderful. If spending more would bring them little additional happiness, there is no virtue in consumption for its own sake.

But if the money could have funded experiences they wanted, time with people they loved, greater freedom or generosity when it would have made a real difference, then excessive caution has had a cost.

It simply doesn't appear on an investment statement.

How do you know whether you can spend more?

This is where good financial planning can be particularly useful.

Rather than asking whether a particular holiday, car or level of annual expenditure “sounds expensive”, you can model its effect.

Start with what your life actually costs and the secure income available to you. Understand what your pensions, savings and investments need to provide. Decide what you deliberately want to preserve.

Then test the plan.

What happens if you spend an additional £10,000 a year during the first decade of retirement? What if markets perform poorly? What if inflation is higher? What happens if you or your partner live to 100?

A cashflow model can't predict the future, but it can help establish whether a decision appears reasonable across a range of circumstances.

Sometimes the answer will be uncomfortable: spending more now would create too much risk later.

Sometimes it might be sensible to compromise.

But sometimes the numbers show that someone could spend considerably more during their active retirement years without threatening their long-term security.

The mathematics can provide something surprisingly valuable.

Permission to spend.

Not permission from a financial adviser. It's your money and your decision.

Permission from the evidence.

Money has more than one kind of return

We naturally expect investments to produce a financial return.

Put £10,000 into an investment and, accepting the risks involved, we hope it will eventually become worth more.

But retirement creates another way to think about return.

Spend £10,000 taking your family away, and the financial return is obviously negative. The money has gone.

Yet you may have bought something else: two weeks together, experiences shared across generations and memories that remain long after the bank balance has recovered from the shock.

That doesn't mean every experience is worth the money or that spending automatically creates happiness. Nor does it mean investments should be emptied in pursuit of experiences.

It simply means financial return isn't the only return money can produce.

Once you have accumulated enough to provide financial security, it is reasonable to ask what other returns you want your wealth to generate.

So, should I spend more in the early years of retirement?

Possibly.

For some people, the financially sensible answer will be no. Their retirement plan needs more resilience, their expenditure is already high or they have important later-life objectives to protect.

For others, deliberately spending more during their healthier and more active years can be entirely reasonable.

The important word is deliberately.

Understand what you have. Know what your life costs. Protect the future you care about. Test what happens if circumstances are less favourable than expected.

Then consider whether some of the money that would otherwise remain invested for another 20 or 30 years could do more for your life sooner.

Because retirement planning isn't simply about making money last for as long as you do.

It is about making good use of it along the way.

A pound at 65 and a pound at 95 may have exactly the same monetary value.

The mistake is assuming they necessarily have the same value to your life.