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  • Writer's pictureDan Haylett

Dispelling 3 BIG Retirement Myths

There are many myths when it comes to this man made invention we have come to call 'retirement'

Following my brilliant conversation with Abraham Okusanya on my Humans vs Retirement Podcast (find out more here) I wanted to focus on 3 of the biggest...

Myth 1

Retirement spending increases every year.

One of the topics discussed in the podcast is that, contrary to popular belief, retirement spending does not increase every year, but rather declines gradually.

This is due to the fact that as people get older, they become less active, and their spending habits change. This is why it is important to plan for the unknowns and to understand the different stages of retirement.

The first stage is the “go-go” stage, which is when people are still active and able to travel and participate in activities such as golf. During this stage, spending is at its highest. The second stage is the “go-slow” stage, which is when people become less active, and their spending begins to decline. The third and final stage is the “no-go” stage, which is when people are largely sedentary, and their spending decreases even further.

Research has shown that, on average, retirement spending declines by about 1% per year in real terms. This means that it is important to plan for the unknowns and to understand the different stages of retirement. It is also important to remember that healthcare costs may rise later in life, but this is often counteracted by spending less on leisure activities.

In conclusion, it is important to understand that retirement spending does not increase every year, but rather declines gradually. It is important to plan for the unknowns and to understand the different stages of retirement. Planning for the unknowns will help to ensure a successful and comfortable retirement.

Myth 2

Care & end-of-life costs could wipe out my retirement plans

One important aspect of retirement expenditure is how financial wealth changes in later life. Research and data shows that from age 84 to 91, median financial assets remained fairly level. This again contradicts the U-shape theory or J-shaped spending pattern in retirement. There is just no sign of a sporadic rise in living costs in later life for most people.

The End-of-Life data suggests that in England there are not such large expenses on average. Just 6% of individuals faced some out-of-pocket costs for medical treatment outside the NHS in the last year of life. We do not have data explicitly on social care expenses, but the EoL data do tell us that only around 7% of individuals received assistance with daily activities from a privately paid employee in the run-up to death. Some 21% did stay in a nursing or residential home in the last two years of their life (32% of these stayed for six months or more), but not all these individuals would have paid for this care privately. The majority of individuals (82%) did not have full insurance for funeral costs, but the median out-of-pocket cost for funeral expenses was only £1,700 in 2002–03 (though this is increasing over time).

Plainly speaking, the worrying spectre of unmanageable care costs are somewhat of a bogeyman. For those who do end up needing to fund care, property wealth remains a valid source of funding.

Research shows that over a third of homeowners at age 50 would willingly move by age 70, and over half would move by age 90, which granted is an above-average life span. However, within the study group, a small number of people stated financial reasons as the sole motivation to move. Adding to this, only one in five retirees end up selling their homes before age 90, without buying another one. For those aged 80 and over, an average (median) of £49,000 is released in the process of downsizing.

When planning for retirement, as stated it important to consider the unfounded fear of unmanageable care costs. Data shows that on average, people who do go into care spend about a year, maybe 18 months, in care and that 75% of them die within 24 months of entering care. This data shows that the fear of care costs wiping out retirement is overstated.

Myth 3

You can only take 4% a year from your portfolio.

The 4% rule was developed by Bill Bengan and is based on a 30-year period of data. The rule states that 4% of an initial portfolio can be spent without running out of money over a 30-year period. This rule is based on the worst-case historical scenario and in most cases, people will end up with more money at the end of the journey.

However, the 4% rule is often misunderstood and taken out of context. This can lead to people spending far too little money in retirement. There are now better ways to ensure that people are spending enough money in retirement while also not running out of money. The best way for you is unique to your situation and is it advisable to work with a financial planner who truly understands you and what and how you want to spend your money.

Guardrails are also a great withdrawal strategy that helps couples to stay on track with their retirement planning. This framework could allow couples to withdraw 5% - 7% of their savings and helps to protect against downward market movements.

Having a war chest of cash is also important in retirement. This helps to alleviate the sequence of risk of return and helps to ensure that couples don’t have to cut their expenditure if they have to withdraw money from their investments. This cash can be used to supplement any withdrawals from investments if needed.

When it comes to retirement, it is important to spend money on what is important to you and have rules to guide you along the way. Conversations with spouses and financial advisors are essential to ensure that couples are making the right decisions and that their values are aligned.

Understanding flexible spending rules is also important to ensure that couples are spending enough in retirement without running out of money.

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