Retirement spending is a potential minefield

Working out how much you can safely spend in retirement is one of the most difficult financial decisions you'll face. If you get it wrong, the consequences can be serious  either you run out of money too soon or you leave too much unspent.

The topic of retirement spending is often clouded by fear, especially around healthcare and long-term care costs. But, as ABRAHAM OKUSANYA explains, the data tells a different story. Most retirees see their spending decline over time, not increase, and assumptions about late-life costs are often overstated.

In this short video, you’ll learn how behavioural biases can lead to underspending and why working with a financial planner could help you make better, more balanced decisions about how to use your money in later life.

Key takeaways

Many retirees underspend due to fears about healthcare and longevity risk.

Spending in retirement typically declines over time in real terms.

A financial planner can help balance evidence with personal circumstances.

Looking for a reliable guide to financial planning?

The award-winning book How to Fund the Life You Want by Second Life Financial Planning founder Robin Powell and Jonathan Hollow offers valuable insights into building a secure financial future.

Transcript

ROBIN POWELL: Working out how much money to spend in retirement can be quite a challenge. Get it wrong and you'll either die rich, not having done the things you wanted to do, or, worse still, you'll run out of money before you die.

ABRAHAM OKUSANYA: Because this, you know, retirement equation is so hard to get, right, you find people either, you know, you overspend incredibly overspending or spending, you know, way less than they should.

RP: So, why do so many people underspend in retirement?

Well, one of the reasons is that they often overestimate how much money they're likely to need for health care or long-term care.

AO: Now, research in the UK, the US and indeed Australia has shown that traditional, you know, spending pattern early retirement, does not actually follow this U-shaped curve that the industry described to people.

So what you tend to find is that people, you know, start spending in retirement and then this spending pattern tends to decline progressively in real terms as they get older.

RP: Of course, you may incur high health care costs, or you may end up spending many years in a care home.

But, on average, spending doesn't shoot up hugely late in life.. and lifestyle expenditure tends to tail off.

If you're not sure about how much to spend in retirement, one of the best things you can do is find a good financial planner.

AO: One of the underrated value of financial advice, in in retirement is this idea that just by having somebody who isn't, you know, exactly in your, you know, your shoes, who is detached from, all of the emotions and all of the, you know, fears that go into retirement planning and, of course, who is knowledgeable, and aware of the extensive amount of research out there, they can blend your personal, you know, requirements, your personal circumstances with what the evidence actually says about retirement planning.

RP: As with most things in life, retirement planning is about striking the right balance.

Of course, you need to spend responsibly, but you also want to avoid regrets at the end of your life about opportunities you may have missed.