Many people find it emotionally difficult to spend their savings in retirement, even when they’re financially secure.
This article explores why moving from saving to spending can be so challenging, and how financial advisers can help clients build confidence, rethink their relationship with money and make the most of their retirement savings.
So, are the people who plan best for retirement the ones who enjoy it least? I ask because I hear it on the Money:Mindshift podcast, in training rooms, in my conversations with advisers. Many people have the money. What they haven't got is the ability to use it.
Why saving is easier than spending
That's a retirement problem many people don't talk about. We've spent decades getting very good at teaching people how to build wealth, and far less time teaching them how to spend.
On the financial transition, the industry has made huge strides. It can model the withdrawal rate, choose the tax wrapper and sequence the whole thing. The psychological transition is different. Turning a lifelong saver into a confident spender may not only be a modelling problem. That shift, from saver to spender, might be the hardest thing some clients will ever do with their money. It is also, increasingly, where advisers can make a real difference.
Dr Riley Moynes, an author and founding partner of a wealth management firm, discovered this first-hand. Despite having all the financial expertise, he found retirement difficult because he'd prepared the finances but not the psychology. His four phases of retirement map the emotional journey well. What's missing for me is the role money plays in those transitions.
Making the most of the 'go-go' retirement years
I prefer this framing from Michael Stein, financial planner and author of the book The Prosperous Retirement. He divides later life into the go-go, slow-go, and no-go years:
- Go-go – the active, travelling sixties.
- Slow-go – quieter spending years.
- No-go – spending climbs again at the frail and often more expensive years.
The point is that a client's spending might not be a flat line drawn across 30 years. It could rise early, dip in the middle, then climb again near the end. Which tells you that retirement isn't one long final chapter you settle into, it's several. And you keep changing the whole way through.
But some cruelty lies within the go-go years. They're the years people might be most frightened to spend in. I've heard from so many advisers who describe a client grasping the idea above and realising, with a bit of a shock, that they're already in the slow-go years. They realise the best years are behind them and unspent.
In my experience, some people fear running out of money more than they fear running out of time. It's not uncommon for net worth and self-worth to become intertwined. During working life, income feels earned and replenishes. But in retirement, that's reversed. Each withdrawal can feel like a loss rather than part of a carefully constructed plan.
But structures and frameworks only solve part of the problem. The bigger challenge is behavioural. That's where I find the distinction between risk tolerance and risk perception becomes useful. And they're not the same thing.
When having enough doesn't feel like enough
Risk tolerance is often described as being similar to a personality trait, and can remain remarkably stable over time. A client's attitude when they're 30 might be much the same as it is at 50 or 70, even through market ups and downs.
But risk perception is the restless one. It's how dangerous something feels right now, and it shifts with mood, with markets, even with how you put the question.
Ask a client, generally, how comfortable they are with risk and the answer may barely change year on year. Ask them how risky it feels to draw down their pot this month, and you'll maybe get something else entirely. Naming that gap, and then patiently helping someone see that their fear and the facts have drifted apart, can be a powerful way of helping a saver become a spender. It won't work on everyone – but it will on some.
Helping clients spend with confidence
The opportunity for advisers is to spot when fear, rather than financial reality, is driving decisions. Helping clients distinguish between perceived risk and real risk may be one of the most valuable interventions advisers can make in retirement.
Consider the psychology (and not only the numbers), and you give a client something no projection can: the ability to spend on their life while they're still well enough to live it.
That, after all, is what I believe the money was always for. 'Your life, your money, in that order' is a principle we discuss often on the Money:Mindshift podcast. The job now is to make sure clients don't spend decades preparing for retirement, only to miss the years they were preparing for.
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