What is the “retirement smile” and why does it matter?

How much income do you think you will need in retirement? This is a question you have probably considered when thinking about the future and is often one without a simple answer.

One of the biggest reasons for this is that you probably won’t spend the same amount of money every year. But while you will have your own unique plans for how you want to enjoy your retirement, most people tend to follow the same general pattern. This is known as the “retirement smile”.

If you want to know what this is and why it matters for your long-term planning, read on.

Your spending patterns are likely to change during your retirement

Before anything else, it is important to understand what the retirement smile is, so you can understand how and why it will affect your long-term planning.

As you might imagine, when you first retire your expenses will probably be higher. After all, you are finally getting the opportunity to enjoy the rewards of all your hard work. It is only natural that you might want to splash out on expensive purchases, like a new car or an extended overseas trip you have been longing for.

On top of this, when you retire, you will want to make the most of your youth and health. You may want to do a lot of travelling, join a gym, or buy a motorhome so that you can take to the road as and when the whim takes you.

After a few years, once you have had the chance to cross a few things off your bucket list, you may prefer to slow down and enjoy the simpler things in life. You may want to spend more time with loved ones, for example, or master your hobbies.

At this time, your expenses will probably fall from their initial high point, when you were splashing out.

Finally, your spending is likely to rise again as you factor in the cost of care. No matter how well you look after yourself, you may find that, at some stage, you need to consider some sort of help in the long term.

Of course, depending on what type of care you need, this can be very costly, which is why your spending is likely to rise again.

So, when plotted on a graph, your expenses start high at the beginning of retirement, start to fall after a few years, and rise again as you get older, which forms the shape of a smile.

 

 

 

 

 

 

Source: FT Adviser

Understanding the retirement smile can help you to more accurately plan ahead

If you want to enjoy a comfortable lifestyle throughout your retirement, it is important to have a clear picture of what your finances will look like. That is why understanding the retirement smile is necessary when you are building a resilient financial plan.

For example, if you assume that your spending will stay constant at its initial high level, then you might overestimate how much you will actually need. In order to grow your portfolio to meet this goal, you may have to expose your wealth to more risk than is truly necessary.

Alternatively, if you fail to account for the potentially high costs of care towards the end of your retirement, you could run the risk of depleting your pension funds too quickly.

Working with a financial planner can help you to avoid these potential pitfalls.

Cashflow forecasting can give you an accurate picture of your financial situation in retirement

Retirement should be a time to relax and enjoy yourself, which is why worries about money are the last thing you need. If you want to gain greater control over your finances, seeking professional advice can really benefit you.

When you work with us, we can use cashflow forecasting to give you a clear picture of what your finances will look like over time. This can be invaluable information, as it allows you to plan ahead effectively.

To start, we will input information about how much wealth you have already accumulated, which provides a useful baseline for the forecast. This may include:

  • Investments (such as stocks and shares)
  • Property
  • Pension assets
  • Cash savings

We will also add data about your income and expenditure, such as your monthly salary and regular outgoings.

With all of this information, we can create an accurate forecast of how your finances will change over time. This also takes into account factors such as life expectancy, the effects of annual inflation, and salary growth.

Having this information can be invaluable as it can help you to not only accrue enough wealth for the retirement you want but also to manage your spending. It can be a huge weight off your mind to know that you will be able to enjoy the retirement you want, minimising the risk of running out of money.

Get in touch

If you want to ensure that you have enough wealth to enjoy a comfortable lifestyle throughout your retirement, we can help. Email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note:

A pension is a long-term investment. The value of your investments can go down as well as up which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The Financial Conduct Authority does not regulate cash flow planning.

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