The household problem of transitioning into retirement

Bob Champion - Later Life Academy
5th June 2018
Bob Champion LLA Later Life Academy
"Retirement transition is a cocktail of ingredients, which after many years of stable income while working could create fluctuating income which the household is not used to. "

When a couple live together they usually have an arrangement as to how they will manage the household bills. There are no rules as to how they should do this; you can think of several combinations of joint bank accounts, personal bank accounts and who pays which regular bills.

The combinations will be influenced by who brings what income into the household and the degree of independence they want in their spending. Another point perhaps to consider is the difference in the ages of the partners. This could be as little as a few months or could be a decade or more.

Their State pension age could have an effect on couples planning to retire at the same time. For many people the State pension is going to be an important part of their retirement income. If one or both are going to retire before their State pension(s) become payable there is going to be a significant shortfall in household income. Similarly, if retirement takes place after they can claim their State pension, should they defer or draw it? If still working should they spend the money or save it for their future retirement?

Going back to the management of household income and spending, what happens if this creates a role reversal? Consider a couple where one receives a lower than average wage, but receives excellent pension benefits, e.g. a low-skilled public servant. Their partner may be a highly-paid worker with next to no pension provision. The couple will have some serious talking about what retirement actually means to them financially and how they transition into it.

Then we have the situation where one or the other may not fully retire. Because of the effects of tax and National Insurance, working 60% of full-time hours means take-home pay is much greater than 60% of what was being received for working what was 100% hours. If one or both of the partners move to part-time working, possibly at different times, what would be the impact?

I would also put into the mix the possibility that one of the partners may decide to start a business. This creates further possibilities that may change over a short period. The business may increase outgoings during its start-up period, and may or may not be successful. If successful it could mean that the household has a period where income received is now far greater than previously. On the other hand it may mean that income is lower during this pre-retirement transition than anticipated.

Retirement transition is a cocktail of ingredients, which after many years of stable income while working could create fluctuating income which the household is not used to. During this period how should the household adjust their spending to respond to the fluctuations and which wealth should they call upon to meet any shortfall?

The early period of retirement is often said to be the most risky if assets are being drawn down with a depressed market value. But does the transition period carry more risk?

Firstly, we human beings are habitual. Unless we have suffered significant income shocks previously, our response to a reduction in income is usually only temporary. If money, e.g. savings are available to call upon we usually quickly revert to our usual spending habits.

Secondly, how many periods are there in the household’s transition? How long does each last? What is the impact on the household income? How will their spending change?

Thirdly, to make up any income shortfall they may draw down the wrong assets. For example, they may draw down pensions when less tax-advantaged investments - which can be drawn down without paying tax - could be available to them.

When we talk of retirement advice we often talk about advising individuals. When dealing with mortgages and equity release, we advise couples.

Much is written about retirement income solutions. Yet the transition into retirement by a household has to be dealt with before retirement actually commences. If the wrong decisions are made during the transition, less may be left for actual retirement.

This is a major question for advisers in terms of when to engage with clients. Should retirement income advisers obtain clients before they begin their household transition, rather than when they are on the verge of retirement? Given all of the above, this would appear to be a policy worth pursuing.

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