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Nuts, Nuts, Nuts! Will you have enough to see you through?

Oct 02, 2018

Andrew Moore, Managing Director and Independent Financial Planner, explores the issue of running out of money in retirement

Squirrels have a simple strategy for the winter months. Collect all the nuts in the autumn, hide them and then try to remember where they put the nuts when they are hungry. They have an inbuilt urge to bury as many as they can, and usually have enough to see them through. It is pretty similar to most people’s retirement strategy. We build up all our assets in our 40s, 50s and 60s, i.e. the late summer and early autumn of our lives, and hope we have enough to see us through the winter.

In the past retirees have ensured that the nuts don’t run out by buying a guaranteed income in the form of an annuity. Some are lucky enough to have final salary schemes from their employer and when combined with the state pension, they are pretty sure that there won’t be any worries. This worked when annuity rates were high and there was a plentiful supply of final salary pensions. However we have a different reality now.

Annuity rates are low, with interest rates down to levels never imagined. Final salary schemes are scarce, and many retirees are now reliant on a very simple equation. How many nuts do I have and will they see me through? The fear of running out is one of the common anxieties that we see in retired clients. Will you outlive your capital? What is it like to run out of money in your later life?

The latest reform of the pension system has given access to pension capital that was previously either forced out as an annuity income or dribbled out from an income drawdown plan. This is fantastic! You can now tailor your retirement to suit yourself. We don’t all want an annuity-based retirement where we have a set amount of income for the rest of our lives. Many retirees want to have some fun and stop collecting nuts early, or sit back and start eating some up now. They are your nuts after all and the Chancellor thinks that you are squirrels that can be trusted to make your own decisions.

The latest reforms are going to create some very happy retirees who will find the right balance between spending too much or too little capital. They will enjoy the early years of their retirement, have few regrets in their 70s and be secure in their 80s and 90s. There are, however, also going to be two sets of grumpy squirrels that we will come across in increasing numbers.

Some retirees will have a fantastic early retirement, a sense of doom in their 70s and then have to throw themselves on the mercy of the government in their 80s and 90s: the retirement binge followed by a long grind. There are many reasons why a number of retirees will fall into this trap: some will have assumed that they would never get into their 80s and 90s, some will be incapable of keeping their hands off their money or misjudge how fast the capital can be spent. Some will fall foul to poor investment choices or inappropriate retirement products. This is all understandable. For many it will be the first time in their lives that they have had access to a large pot of money.

The second set of retirees will have a late starting retirement, frugal early years, regrets in their 70s but a very secure 80s and 90s. This is standard issue retirement, the safe path! However, this is a retirement of worry and perceived financial scarcity. The strategy is very sensible and highly recommended when there is a genuine scarcity of nuts but there is such a thing as reckless caution which means playing it safe when you have the capacity to retire early or to enjoy yourself more fully in your 60s is a mistake.

I often come across clients in their 70s where one partner has died, and they feel that they never made the most of their 60s together. They worried about retiring early, about spending some capital and then sadly something unexpected happened. It is not easy enjoying stored-up wealth on your own in your 70s, when all you wanted to do was enjoy it with your departed partner. The ‘health’ dice are increasingly loaded as you get older and your real scarcity is time and often not the money.

The role of a financial planner is not widely understood. We are often looked at as pension and investment salesmen and there are many ‘financial advisers’ doing only that. What they don’t do is look deeper to find out about your unique aspirations for your future, creating an individual plan just for you so that you can feel confident and excited about your retirement. Find yourself a financial planner with a focus on you and they can open up your store of assets and make them work for you, to your requirements. That way you can be a happy squirrel and not a grumpy one for many winters to come!