Gareth James: I’ll take a coffee and a slice of later life budgeting

    Rather than focussing on the cliché of cutting down on small pleasures to save for retirement, let’s make sure we’re advocating the value of making the right spending choices to help our pensions last longer, Gareth James writes

    We can all come up with examples of retirement saving clichés which, if we’re in the right mood, we find amusing, but if we’ve got out of bed on the wrong side are annoying.

    My own favourite would be stock photos of pensioners. Typically they’ll involve a pensioner hunched over a laptop looking concerned. Alternatively we’ll see a pastel clothed, happily smiling older couple in an unspecified sun-kissed location, probably with a glass of wine in their hands. No real harm done but a little more imagination in the staging of the photos wouldn’t hurt!

    We also see clichés involving the accumulation stage of retirement planning. A favourite here is highlighted by a simple internet search of “coffee and pensions”. The results will bring up a plethora of articles with headlines along the lines of “millennials spend more on coffee than they spend on pensions” or “give up the daily coffee and retire a year early”.

    The articles may attract criticism on social media, but are generally well meaning. The vast majority of Retirement Planner readers will do their bit to promote the benefits of making sure enough is saved for later years. These articles focussed on sacrificing immediate consumption to provide for a better retirement play their part.

    One aspect of these budgeting choice themed articles that I find strange, particularly in our world of DC savings and the pensions freedoms, is the fact that they are always focussed on the accumulation phase of retirement saving.

    This lack of focus on the impact of spending choices on financial outcomes in later life makes sense if we look backwards to a world where the bulk of a retiree’s income would come from sources offering a guaranteed income – state pensions, annuities and scheme pensions.

    The state pension continues to offer an important source of guaranteed income but, if we look beyond that, we’re moving to a position where a greater proportion of pension income will not come from products providing a regular, steady income; but from a pot of money that can be drawn from as and when the retiree requires the funds.

    In this world of personal responsibility in retirement, people need to work on ways to make their pension pot last longer. The regular pension cheque isn’t guaranteed to be coming through the post each month any more.

    The lack of focus on the impact budgeting can have on retirement outcomes isn’t restricted to these ‘give up your coffee a day’ articles. It extends to the likes of Pension Wise as well. I’ll mention that I’m a fan of the Pension Wise website and wider service, which is useful because it won’t be too long before I can book an appointment. However one of the things that surprises me when I look at their web content is that the ‘make your money last’ page has no reference to budgeting, while the “work out what you’ll have in retirement” page focusses almost entirely on working out what someone’s retirement income will be. An indirect reference to working out how much you need is the closest Pension Wise offers to help with budgeting.

    In the context of the lifespan of retirement this is even more surprising. Men aged 55 and over can on average expect to live to at least 85, while women aged 55 and over can expect to live to 88. The implied savings sales pitch in ‘ditch the coffee’ articles is typically reliant on an accumulation phase of around 30 to 40 years. It’s now a reasonable expectation that decumulation will last broadly the same amount of time, so why is this subject matter focussed on younger savers?

    Perhaps there’s a psychological element to it? The articles focussed on younger savers are aspirational in content “give up ABC and your pension can be worth £50,000 more”.  A message of “give up ABC and your pension won’t run out for an extra 5 years” isn’t quite as attractive. Some older individuals might also claim the message is patronising, although I’m sure plenty of millennials find the clichéd message delivered towards them to be patronising as well.

    Although the message isn’t as aspirational and may be classed as patronising I’d argue it is equally as important. Perhaps reframing the budgeting message away from giving up consumption to making smarter choices will help? One of my parents recently bought a new car and chose a hybrid model rather than petrol. One of the factors involved in that decision was that it would cost less to run and so would allow their savings to go further.

    So let’s not create another cliché of penny-pinching pensioners, but make sure we’re advocating the value of making the right spending choices in helping our pensions last longer.

    Gareth James is head of technical at AJ Bell