Saving for retirement keeps us on our toes

Risk is a word that makes most of us nervous. In investment, we often think of risk as the permanent loss of our funds.

But risk also means uncertainty, values moving up and down, performing below a benchmark, missing opportunities, making mistakes, not having a clear plan and lacking knowledge.

Another risk is not saving enough for the retirement we want or finding out that our money won’t last as long as we need it to. Not knowing how long we will live makes it hard to plan our spending.

Over-shooting and not spending, "just in case", feels unfortunate if we didn’t need to and there are goals left unachieved; equally so, it’s not a good outcome if we end up living longer than expected and must be cautious with our spending.

A 2018 United States study found that, in the first 20 years of retirement, most people were spending only a small part of their savings, about 25% (and even less for wealthier groups).

Many in the study were only using the money their savings generated, and not touching the original savings. While these are average numbers and some spent most or all their savings, surprisingly, one-third of retirees had more money than they started with.

The fear of running out of money slows down our spending. Additionally, after years of paying off mortgages, raising children and saving, spending money in retirement is a big change that many people aren’t ready for, especially with the uncertainty of lifespan.

We only get one shot at using our retirement money and this puts a lot of pressure on decision-making. It can be scary to leave the working world behind, covering expenses from savings. Our inner voice starts asking: what if unexpected needs arise, what if there are economic problems or high inflation comes back? People may also limit spending to leave money to their children, even when they are doing well already.

Navigating retirement involves finding a balance between enjoying the present while being financially secure longer term. This balance requires thoughtful consideration of spending habits, investment strategies and potential unforeseen expenses — as well as knowing what makes day-to-day life worthwhile, including desired experiences and goals. The solution is partly an investment one, including an appropriate mix of income and growth investments and being diversified. Success also lies in having a sound, regularly updated financial plan, ensuring that spending positively contributes to happiness, and sleeping well with the knowledge that future needs are also under control.

Financial planning considers the inherent uncertainty of the future. It’s not set in stone but is regularly revisited and adjusted. This allows for course corrections as the world or retirees’ needs change, and provides ongoing reassurance that spending is appropriate.

Knowing you can enjoy things like the cruise you’ve always wanted, while still having enough money at 95, is a significant comfort and a key advantage of financial planning.

 - Stephen McFarlane is director of Timaru financial planning firm Central Wealth Ltd.