Steve Wilkie: Helping clients ‘climb the pyramid’

Getting the balance right between spending and saving up cash in retirement has been made more difficult by pension freedom, writes Steve Wilkie. However, advisers are well placed to help clients assess their needs

For all the faults associated with annuities at least you knew where you stood with them.

It wasn’t ideal when annuities rates fell to record low levels, but at least there were no surprises. You knew what your annual income was for life, and you could budget accordingly.

Today, the landscape is entirely different. The trend today is for a diversified approach to retirement income.

At this point, I’d like to turn to Maslow and his famous hierarchy of needs – and you thought Maslow had been consigned to the bargain basement bookstores.

For those unfamiliar with Maslow’s hierarchy of needs, it is one of the best-known theories of motivation.

The hierarchy of progressive needs is often displayed as a pyramid, with the most basic needs – breathing, food and shelter – at the bottom of the pyramid, and the more complex, conceptual needs – morality and creativity – at the peak.

To reach the top, you need to first satisfy the prior needs.

Many financial experts now propose that you have an annuity to look after the more basic needs. These are not the things you want to pay for by rustling around for loose change in the back of the sofa. These are essential items you can’t do without.

The theory goes you should have no tolerance for risk when it comes to your money earmarked for these purposes.

However, breathing, food and shelter, while essential, are not going to be the highlight of your retirement.

Taking some risk

With the basic needs catered for, it’s then about adding some investment risk to the rest of your pension pot to meet needs further up the Maslow pyramid.

There is a level of skill and strategy in making your money go further to help you live the lifestyle you want, while at the same time not outliving the money you have.

Whatever an individual’s needs or ambition, retirement used to be a time of uncertain length but relatively certain money. Now, with rapid, daily advancements in life expectancy and more of a blank canvas when it comes to structuring your retirement income, it has become a time of very uncertain length and relatively uncertain money.

Add to this the range of needs that people want to fulfil, from the basic through to the conceptual, then it is no surprise that the pension changes have retirees more than a little flustered and unsure.

This is evident in new research by the International Longevity Centre UK. They analysed the spending patterns of the over 50s to understand how those approaching and in retirement spend their money.

Rather than the leafy lanes of Leamington Spa being lined with Lamborghinis, it turns out that as we age, we actually spend progressively less.

A fear of running out or outliving their money, confusion about long-term care costs and wanting to leave a hefty inheritance has seen that retirees actually save more, hoarding cash in a current account for a rainy day.

While saving is always commended in the financial community, it should come from the right place, not a fearful one.

The research suggests that, regardless of income, someone aged 80-plus spends on average 43% less of their available income than a household headed by a 50-year-old. This fall is mainly attributed to spending less on non-essential items, or those higher up the hierarchy of needs.

By the time someone reaches 80, half of what they spend is on essential items, the bottom rung of Maslow’s ladder.

Getting the balance right

Retirees have earned the right to live the lifestyle their pension pot can provide. Admittedly, getting the balance right is tough and the future is always uncertain.

We have seen that having a drawdown lifetime mortgage provides a safety net.

Essentially it’s a line of credit to access when required, giving retirees confidence to start incrementally spending and reaching the right balance between frugality and enjoying all that they worked for.

As more people are exposing pension pots to investment risk, it also means they have money there to access when the markets are down, instead of divesting their fund at an inappropriate time.

The role of any adviser in the retirement world does not simply relate to money and wealth.

Money and wealth are simply the means to other more meaningful ends. It’s important that our customers understand the reality and do not live the wrong life through the fear of the unknown.

Steve Wilkie is managing director at equity release specialist Responsible Equity Release