We discuss elsewhere the absolute importance of getting your own personal cash flow assessed as soon as you can once you pass 50.
It doesn’t matter what age you are today, if you haven’t had your cash flow analysed (even if you are 68 or 74, for example), please get one done.
It’s the most valuable exercise anyone can do to ensure their finances are under control.
At a general level we would like to explain to you the ugly truth about retirement planning from a financial perspective.
Don’t judge today’s retirees!
Most people tend to judge their financial prospects beyond age 50, let’s call this the retirement years even though for many these years may start much later, by looking at the retired population today.
That is a bad mistake.
Today’s retired population represent a picture of a population who had a completely different accumulation/decumulation experience to the future population.
The retirement years of someone hitting 50 now is going to be very different.
The period 2000-2020 was completely unprecedented – almost the opposite of a perfect storm. Let’s describe it as a perfect sunset. Or the most delicious cocktail.
Let’s consider some of the reasons why these descriptions are valid:
- This period saw baby boomers enter retirement. Baby boomers were the first generation to accumulate wealth as a population.
- Many of these retirees entered retirement with guaranteed income from generous final salary pension schemes.
- House price inflation has been steady (with a blip in the middle).
- Inflation has been benign.
- State spending bloated, as the entire period was accompanied by consistent government deficits and a political back drop which favoured all things ‘pensioners’.
- Asset prices, without being spectacular, have risen generally.
- Taxation was relatively low.
- The earlier period 1980-2000 was almost unbelievably perfect for accumulators. This allowed retirees to easily accumulate enough to retire.
Of course, this is a big broad brush summary, with lots of detail left out and many, many people who did not enjoy the growth in the retired population’s general prosperity.
But overall, conditions have been exceptional for those people retired in 2000 and most who have retired since.
Interest Rates and Inflation
Interest rates have been flattened. On the one hand, this may not look favourable for retirees as the interest on their savings has been so low.
But this has surprisingly little negative effect because retirees either by design or default are effectively decumulating not accumulating.
This means that growing their wealth through ‘cash’ is never going to be a viable strategy as you spend your ‘cash’ (beyond your guaranteed income sources), therefore the marginal gain from savings rates has limited impact, and live in your house.
Also, if inflation is low, guaranteed income (e.g. the state pension) has much more value than if inflation is high, plus if assets are growing, such as shares and the dividends they produce, then interest rates can be superfluous as any top up income can come from other areas (such as an equity ISA).
From deflation to…
A shift in this picture will not occur in a hurry, it will take 10-20 years.
That shift is underway, so it is reasonable we suggest to consider 2020-2040 as being completely different, once it plays out.
You can easily see the pressures coming through today.
For example, with the challenges in the NHS, social care, with the rapidly rising prices of consumer goods, with an ongoing completely unrealistic rise in property prices, with government finances creaking, with taxation increasing.
These are classic signs of the shift occurring.
For anyone decumulating, deflation is fantastic – and in so many ways 2000-2020 was a classic deflationary period and experience.
That’s now over. So, those of you early on in retirement, those of you relying on conditions remaining the same in retirement, those of you contemplating retirement – must consider 2020-2040, not 2000-2020.
And when you do this, you have to plan your decumulation differently, because if you plan it as if it were going to repeat 2000-2020 – you could come horribly unstuck.