Patterns of expenditure
Over the course of retirement, a client’s expenditure can change significantly as their goals, expectations and circumstances are likely to change. What’s more, it’s near impossible to accurately predict someone’s longevity or health needs, all of which will have an impact on a client’s income requirements.
So how can you help your clients achieve financial security when their future expenditure is uncertain?
The commonly used ‘U’ shape pattern of expenditure
For those that do retire, at outset, expenditure may be at its highest. People are likely to be in good health and are often keen to do all those things they always wanted to do once they retired. There is an expectation that over a number of years, a client’s health may deteriorate, which often means expenditure begins to decline. If residential care is required towards the end of a client’s life this could reverse the downward trend and cause a steep increase in expenditure. This is demonstrated in figure 1, but it is only one example.
The U shape isn’t a universal pattern
There are any number of different patterns of expenditure during retirement. Figure 2 shows expenditure at its highest in the early years, it then declines as poor health sets in but without the need of expensive residential care towards the end of life.
In other cases, health won’t decline at all and expenditure will mostly remain consistent. Some people will stay healthy right up until the point they die in their sleep or after a short illness or accident (see figure 3).
There is also a growing trend towards a gradual transition into retirement or not retiring at all. The number of employees expecting to work past the age of 70 has nearly doubled in seven years1. A fourth pattern, assumes someone taking a small income in the early years to supplement reduced earnings, then retiring outright and finally expenditure reducing as health and mobility deteriorate (figure 4).
The great unknown
Even if there was one single pattern of expenditure during retirement, it would still be difficult to plan ahead, because there is one more unknown:
Timing. The timing of expenditure is impossible to predict.
- How can we know how long a client will spend in each phase? For example, how many active years will they enjoy?
- When will they start to slow down and how quickly?
- If long term care is required, when will it start and when will it end?
Given the range of possibilities it may seem sensible to consider the flexibility of a drawdown solution, but this doesn’t deal with the longevity question. This is why the layering together of different solutions can be effective as it gives you more flexibility. It is far easier to re-route one of many solutions than it is to reroute just one retirement solution if, or when, your client’s retirement income needs change.
1Number of Brits expecting to retire in their 70s doubles, Willis Towers Watson