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Retirement planning, and how quickly it can change

Bob Champion | Air Later Life Academy
|
10th February 2020
Bob Champion LLA Later Life Academy
"The FCA expects advisers to know their customer. How easy is that if the customer may very soon change?"

In front of you is a client who is about to embark on an adventure unlike any adventure they have been on before. They are about to retire.

You have carried out your factfind. You have carried out a risk assessment. You know what their assets and objectives are. You know them pretty well, or do you? For instance, in 24 months, when you meet them for a review will the same person be sitting in front of you? Will you have to change their financial retirement plan to suit the changes that have occurred. Why will changes occur?

The person sitting in front of you is someone who is employed and thinks they know what retirement means for them. 24 months later the person sitting in front of you has experienced retirement. They may not have been able to stick it – after all, 25% of retirees return to work within five years because retirement is not for them.

On the other hand, there will be those who have taken to retirement like a duck to water and are taking up every opportunity life offers. They may, however, be spending far more than anticipated meaning the plan will have to be revisited. As with all things, there will be many in-between positions. The behaviours of human beings and what influences those behaviours are not uniform.

The FCA expects advisers to know their customer. How easy is that if the customer may very soon change?

Let’s take an example. Work currently restricts Mary to playing golf just once a week. She believed this would continue but a few months into retirement she has comes across many new golfing friends, joined a second golf club and three rounds a week are not uncommon. Many new interests that she never expected are occurring as a result of her new social activity.

Then there’s Sue who also enjoys playing golf once a week. However, she takes the view that work got in the way of her home and garden. She spends most of the first year of her retirement around the house and garden doing jobs that had been put off.

Both will tell you they don’t know how they used to find time for work.

Mary’s spending is going through the roof. Sue, in the first year of retirement, is spending less than was budgeted for. In the second year, will Sue become Mary mark II? Or will she tackle that long list of books and films she never found the time for?

Away from finance, two books have recently been published. One is called ‘How to Age Joyfully’ by Maggie Pigott and the other is ‘Extra Time’ by Camilla Cavendish. Both consider the impacts a longer, healthy life expectancy will have on retirement behaviours. Should advisers, therefore, spend more time trying to understand the human side of retirement?

Psychometric testing of soon-to-be pensioners could be the next growth industry in retirement planning. Before someone goes off and builds a software package, it may not work. It would, after all, be analysing the working person, not the person who will be retired.

George Jerjian has produced a blog on his website, ‘Retirement is your final opportunity to discover who you really are’. The blog is based on research from Harvard Business School and the key message is that retirement is not just about finance, it is also about identity. In some people, this creates an identity crisis.

Ask a retiree what they do? They may say I am a ‘Retired Accountant’. If they are retired, they do not practice accountancy. In that respect, they are no different from a ‘Retired Scaffolder’. Both are retired. How will or how should they react to being just ‘Retired’?

What they do and how they react will, as with Mary and Sue, influence their retirement spending. If retirement can cause a dramatic change in outlook, psychometric testing before the individual has fully transitioned into retirement will not be of use.

We have two transitions into retirement. The transition from the working individual to the retired individual, and the financial transition. The latter involves when and how retirement savings will be drawn down including the State pension, and whether there will be a clean break in employment income or a gradual run-down of employment income.

A probable spending pattern is manageable. Knowledge of the individual is important for this purpose. hut what if the individual changes and this changes their spending? We know that over-spending in the early part of retirement can seriously impact on the sustainability of the retirement income strategy. A poor investment performance at the same time could result in a crisis unfolding.
Not all will overspend but those that do need to be identified early and have contingency plans in place. Identification will require more frequent reviews during the early stages of retirement.

These will emphasise changes in spending patterns and understanding about what is driving them.

Contingency planning must therefore include when and how housing wealth could be used to enable the retirement spending patterns that are emerging to be facilitated.

Retirement may be one of the biggest changes an individual will experience. Financial plans should, where possible, enable the individual to use retirement to discover who they really are. For many that must include the use of housing wealth.

 

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