What shape is your income in retirement?

18 December 2018

Over the years I have had many client meetings where we have discussed retirement; what it looks like, what you will do with your time, what income do you need to support that lifestyle?

What it has taught me is that someone’s retirement is as unique as the individual themselves. However, in overview I have found that, for many, their income needs in retirement fall into one of the following categories:

The ‘J’ shaped retirement

This would be typical for someone working long hours, with an intense career or business interest. Put simply, if you are working 50 or 60 hours a week, your ability to spend is severely curtailed.

As such, rather than reducing, your expenditure goes up in retirement, sometimes substantially. The sudden ability to holiday more or simply occupying 10-12 hours a day, which was previously taken up with work time, can see your outgoings ramp up. This sometimes catches people out – at the time they see a reduction in household income they suddenly spend more, which exacerbates a tightening of cashflow.

The vertical retirement

Although rarer, sometimes costs can go down in retirement. This is often because mortgages are then paid off and costs associated with protecting your standard of living (such as insurances) are no longer needed.

Another common example can be reducing from two to one vehicle if both sides of a couple are no longer working.

In these circumstances costs can go down as any increased discretionary spending is dwarfed by the savings for these “bigger ticket” items.

The straight line retirement

Increasingly people have less of a cliff-edge retirement. For example, they reduce hours, or they choose less demanding roles rather than full retirement.

However, where this does still occur, a phasing into retirement can often be a good “trial run” where pension income (alone) is unlikely to replicate full earning capacity. Furthermore, continuing to work may mean delaying drawing pensions, giving additional sums at a later date. As such this can see a rather flat shape to retirement.

The late curved retirement

Perhaps the one retirement that none of us want – whereby late in life costs ramp up. As health deteriorates costs can go up in old age, with increased help required in and around the home. Whilst some modest help is available from the State, all/the majority of this is often self-funded, and as such costs can ramp up substantially in old age.

The ‘hill’ shaped retirement

Similar to the ‘J’ shape, but where matters settle down. Inevitably as we grow older the desire to charge around the world or to travel long-haul diminishes, or you simply “tick off” the destinations you want to visit.

Often people settle into a simpler lifestyle, and they see their expenditure spike in early retirement and then drop thereafter.

If you are thinking about retiring and would like to discuss your plans, please contact me.

  • For further information please contact:

    Stuart Coombe

    Chartered Financial Planner, Rural Services, Exeter & Yeovil

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