In the good old days, retirement was simple.
You worked for 30 years with the same employer, received your gold watch for long service and then retired with a 2/3rds final salary pension – what could be more straight forward!
Nowadays, things are a little more complex.
We don’t tend to work for the same employer. Gone are the days of the final salary pension, leaving individuals to take more responsibility for their own retirement income. This retirement income will often come in many forms. Gone are the days of a single employer final salary pension that was completely automatic (no thought required).
Now we often work for 5 or more employers, collect various personal pension plans, company pensions, ISA’s and other savings vehicles for our retirement.
All of this needs far more management and input than has previously been the case. We no longer have the automated final salary pension where your retirement income was simply dictated by your final salary and length of service.
Now we have decisions on how much to pay in, what investment funds to choose, how much tax free cash to take and so on.
Now, the new auto-enrolment legislation has gone a small way to automating the pension system again, but most people acknowledge that this is just a sticking plaster and much more will need to be done to see the population at large enjoy a prosperous retirement.
The psychological shift
Perhaps the biggest shift (and one that people are yet to fully get their head around) is the psychological shift from an accumulation to a de-cumulation mindset when people retire.
Back in the days of fixed income final salary pensions, you didn’t really have to worry about this. You never accumulated a pot of money in the first place, you simply earned membership in the pension scheme which gave entitlement to an income in retirement.
At retirement that income turned on and you then had a nice monthly deposit into your bank account.
In the new world of pension freedoms, people will spend 20, 30, 40 or dare I say perhaps 50 years accumulating a pot of money. All of a sudden, when they retire, they then need to start de-cumulating (i.e. spending) that money.
The problem is that this is not an easy shift to make
When you have spent a lifetime saving money and building up your nest egg, it can be very distressing to see it start to fall in value.
Various studies have shown that in the investment markets, human beings feel the pain of loss about twice as strongly as the pleasure of gain.
I suspect that the same psychological forces are at work when we start to spend down our nest-egg – it hurts!
This often results in people holding back on their retirement spending plans because they simply don’t want to see the value of their pot fall. But this can lead to some real problems.
Occasionally we meet people who are living on a shoestring, despite having 7 (and sometimes 8) figure retirement portfolios and this is all because they don’t want to see the value of their precious nest egg go down.
But go down it must if we are to enjoy a great retirement – indeed, one must ask the question – if you wont spend the money in retirement, when exactly will you spend it?