Permission to spend


One of the biggest challenges for retirees is how to plan the use of their retirement nest egg.

Accumulating savings and investments during your working life is hard work. It requires discipline and sacrifice to set aside funds for later in life and there is a sense of immense relief in getting to retirement with a decent lump sum set aside. However, the hardest part is yet to come. Because retirement money is so hard won, it can be nerve-wracking trying to decide what to do with it. Indeed, underspending can end up being as much of a risk as running out of money in retirement.

A key issue to be decided is whether to gradually run-down retirement capital over time or just live off the income from it, so the capital is still intact at the end of life. These days, most people are not concerned at all about leaving money for family. The general view is that the kids can have the house and whatever is left in the bank or investments. After all, isn’t it up to each generation to make their own way in life?

However, the uncertainties and anxieties of managing money combined with the lack of planning mean that many retirees underspend during their retirement. That is, they die with more money invested than they intended to have at that time.

In times gone by, it was common for parents to leave houses, farms and businesses to children to preserve family wealth. These days, with investment returns low and people living longer, it is increasingly difficult to eke out a living in retirement just by using the income from investments. Retired investors often overlook the fact that investment return is made up of both income and capital gain. Both can and should be used to supplement income. Investing in assets which produce income but no capital gain, such as term deposits and bonds, inevitably mean lower returns and more tax. Capital gain comes from growth assets such as shares and is accessed for income by selling part of a holding or portfolio. It is important to track the total return (income and capital gain) on an investment portfolio so you can make informed decisions about how much to take from that portfolio.

Choosing to use some of the investment capital has a significant impact on the amount of capital needed to produce the amount of retirement income required. For example, assuming an investment return of two percent after inflation and tax, you would need investment capital of $500,000 to produce an annual income of $10,000 while leaving your capital intact. However, if we assume capital is run down over a period of 30 years, you only need around $228,000.

Spending your capital doesn’t mean being wasteful with what you have. There is a balance to be struck between frugality and lavishness.
There are some people who have no qualms at all about spending every cent they have and perhaps every cent they can borrow. Most of us, though, feel at least a twinge of guilt when we spend money on expensive or nonessential items. There’s a little inner voice reminding us that we can’t really afford it or that we should be storing money in case we need it later. Feelings of guilt come from a combination of things we have learnt or observed in our childhood, our own life experiences and pressure from others. While there are some people who you might call compulsive spenders, there are others at the opposite end of the spectrum who you might call compulsive savers. They are so focussed on saving for the future that they miss out on enjoying life in the present. Such people are usually overly concerned about financial security. They are pessimistic and fearful and prepare themselves for the worst.

Managing money in retirement is all about planning when it is to be spent and investing it for a good return until such time as it used.

The truth is that money only has value when it is spent, and if you don’t spend your money your children and grandchildren certainly will. So, don’t feel guilty about using up your hard earned nest egg. You have permission to spend!

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Written by:

Liz Koh

Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.