I was with a client recently who is on the cusp of stopping work and moving to the next phase of life (I try to avoid using the work “retirement” prefer “next phase of life”).
This is a key life event with many factors to be considered, and the main areas we discussed:
Lifestyle Objectives
Once paid work stops – what is next?
Many of us are so busy in our day-to-day lives we don’t stop to think about what we would do if we had more time. How would we fill the days? What would give us a sense of purpose? Where would we go, who would we see, what would we do?
I often hear travel as an objective but without unlimited funds most of day-to-day life is not going to be spent travelling so what do these weeks look like?
A phrase I like is having “Enough purpose to get out of bed in the morning and enough financial security to sleep at night.”
The Psychological Effects of Stopping Work
Stopping work is a major change – someone can go from having a highly responsible job to a “retired” person overnight. This shift is not to be underestimated. I have often seen this as a time when people reflect on their lives so far and the awareness of their own mortality can create a desire to make the most of the remaining time.
Work can create a social environment for many people and the loss of these daily interactions can be keenly felt.
Work creates a structure to the weeks, and I can remember visiting my Grandparents when I was young. It was a Bank Holiday, and I remember my grandfather saying that “everyday is a Bank Holiday to us”. At the time this sounded good but now I am not so sure.
Finding a sense of purpose (with either paid or unpaid activities) is common to “feel useful” and create social contact.
The Financial Effects of Stopping Work
Whilst working we are used to having a monthly salary paid into our bank account. Once retired we will have a degree of “secure” income from the State Pension and any Defined Benefit pensions. If Income drawdown is used to generate income from personal pensions, then accepting that this fund value might be decreasing (but not beyond a conservative life expectancy using a lifetime cashflow – we generally use age 100) to fund our lifestyle might be challenging as there are no more salary credits to replenish this.
We could, however, choose to purchase a guaranteed income from a lifetime annuity and then forego the flexibility of income that income drawdown provides. (My experience is that expenditure can initially after we stop work {hopefully we have time, money and health} and then drop as we reach later life when we either can’t or don’t want to do as much, with this potentially increasing significantly if care is needed later on).
Having a lifetime cashflow is valuable here to provide an idea of what the future might look like with agreed assumptions. The cashflow is never “finished “as it needs to be reviewed every year to factor in all the changes that will occur.
The value of the cashflow is not in predicting the future but in providing reassurance the future looks secure so we can move to the life beyond work with confidence.
Conclusion
Financial Planning is based on numbers but as the saying goes “life exists outside of a spreadsheet” and the value of an objective third party who listens, understands and help to craft a plan for a “life well lived” and continues to work in partnership through this key life transition and beyond is not to be underestimated.
Warm Regards
Neil
