Retirement planning can be tricky.
After decades of saving and building wealth, it can be incredibly challenging to shift from growing your money to spending it.
This change often brings two common worries:
- FORO (Fear of Running Out): Worrying that you will outlive your savings.
- FOMO (Fear of Missing Out): Spending too cautiously and missing the chance to enjoy retirement to the fullest.
FORO vs FOMO
While working, most people focus on saving and feel relaxed about market ups and downs - they don’t need the money yet and can even benefit from market downturns by investing more during such periods.
When retirement begins, that perspective changes. You’re no longer adding to your savings but withdrawing from them, making you more vulnerable to market downturns and unexpected costs like healthcare.
This can lead to anxiety about running out of money, even for those in a strong financial position.
As a result, many of us end up spending less than we could during retirement. This can mean missing out on opportunities like:
- Fulfilling bucket-list dreams, such as travelling the world.
- Investing in our health, like regular check-ups or hiring a personal trainer.
- Sharing our wealth with loved ones through financial gifts.
How to Balance FOMO and FORO
As Financial Planners, one of our main goals is to help people nearing or in retirement feel confident that their savings will last, so they can enjoy their retirement without worrying or missing out on their dreams and goals.
We do this in several ways.
1. Cashflow Modelling
Regular readers will be familiar with Cashflow Modelling.
This combines your current financial position with various assumptions about inflation, investment returns, spending, etc. to project your position forward. It gives a clear picture of whether you’re on track to meet future spending needs and maintain your ‘best life’ in retirement.
For those approaching or in retirement, we take this further by stress-testing the model for:
- An increase in expenses, such as long-term care.
- Lower-than-expected returns.
- Higher-than-expected inflation.
- A market crash shortly after retirement (i.e. the worst possible time).
Additionally, we use stochastic modelling, which looks at real historical data on inflation and investment returns dating back to 1915. This method shows how your plan would have performed if it had started during every month possible in the last 110 years, giving a range of outcomes from the worst to the best scenarios - a so-called fan chart’.
The results provide a "Sustainability Score," showing the percentage of historical scenarios in which you would have had enough income and savings to cover your spending needs for the rest of your life. This approach also naturally accounts for major events like wars, pandemics, market crashes, and periods of high inflation.
If your plan holds up under these various tests, you can feel confident in your ability to spend or gift money without fear.
2. Secure Income in Retirement
Securing a portion of your income through guaranteed sources can reduce anxiety about running out of money.
For example, purchasing an annuity ensures you receive a fixed income for life, covering your essential needs no matter what happens in the markets.
Example: Charlie & Claire’s Annuity-Drawdown Blend
Charlie and Claire, both 65 and newly retired, have £1 million in pensions and £500,000 in other investments. Later this year, they will start receiving full State Pensions of £12,000 each annually, which are guaranteed and inflation-adjusted.
They estimate their essential expenses to be £36,000 a year (£3,000 per month) and their additional spending (e.g., holidays) to be between £20,000 and £30,000 annually. To secure their basic needs, they decided to:
- Take £125,000 tax-free cash from their pensions (25% of £500,000).
- Use the remaining £375,000 to buy two annuities.
These annuities provide a combined gross income of £24,000 per year (about £19,400 after tax). Together with their State Pensions, this gives them a secure post-tax income of around £3,600 per month, enough to cover their essential expenses for life. Importantly, just over half of this income is protected against inflation.
Why this works
This approach ensures that Charlie and Claire will always have enough income to meet their basic needs, regardless of how long they live or how financial markets perform. At the same time, they retain £500,000 in other pensions, plus £125,000 in tax-free cash and £500,000 in investments for other goals, such as bucket-list experiences or gifts to family.
This strategy provides peace of mind and flexibility, with basic needs always covered and room to pursue additional aspirations.
3. View Your Home as an Emergency Safety Net
Many retirees overlook the role of their home as part of their financial plan. If you face a significant unexpected cost in later life, you could release equity from your home by downsizing, renting, or using equity release.
The idea of moving from owning a home to renting will inevitably raise a few eyebrows, especially in the UK, where home ownership is highly valued.
However, renting can offer more than just freeing up money tied up in your home. It also eliminates the hassle of maintenance, paying utility bills, gardening, and other responsibilities. For many, renting a serviced retirement apartment can be a practical and stress-free solution.
4. Adopt a Guardrails Spending Approach
A guardrails spending strategy provides a practical balance between the fear of running out of money and the risk of not fully enjoying your retirement. It sets an initial spending level based on your financial position and adjusts it each year, depending on how your finances perform.
Here’s how it works:
- Set a Starting Spending Level: Start with an amount that has an 80% likelihood of lasting throughout your retirement, based on the stochastic cashflow modelling we discussed earlier. Choosing 80% (rather than aiming for 100%) strikes a good balance between avoiding the risk of running out of money (20% probability) and the risk of under-spending in retirement (i.e. the risk of missing out).
- Adjust Spending Annually:
- Increase Spending in Good Years: If your "Sustainability Score" (the probability of having enough) rises above 100% due to strong market performance, reward yourself with a "pay rise" for the coming year.
- Reduce Spending in Challenging Years: If your score falls below 60%, perhaps due to a market downturn, temporarily lower your spending to bring the score back to a safer 80%, ensuring your plan remains on track.
In essence, this strategy allows you to enjoy more after a period of strong market performance, while staying cautious during tougher times.
This flexible approach ensures you can live confidently in retirement without compromising your financial security. Stay tuned for a full blog next week, where we’ll dive deeper into the details of this guardrails strategy!
Conclusion
Retirement planning isn’t just about numbers; it’s about finding balance. By addressing fears with solid strategies like cashflow modelling, guaranteed income, and adaptable spending plans, you can reduce anxiety and focus on enjoying this new chapter.
If you’d like help creating a retirement plan that works for you, please reach out.
Please note this blog is for general information and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and does not contain all the information that an investor may require to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is correct as of the date it is received or will continue to be correct. We cannot accept responsibility for any loss due to acts or omissions made for any articles.
