Moving on, financially

It’s important to establish with some precision how much is enough. Successful professionals tend not to be great at keeping detailed records of their spending. Why should we? It’s not essential. But as you approach the point at which you move on from your main career, it’s important to get a better understanding of what you really spend, and need to spend.

It’s not a great idea to impose a sudden discontinuity in your lifestyle. So if you think that some paring back of expenditure might be required, it’s worth starting sooner rather than later. We’d always tried to keep our spending at a sustainable level and so we didn’t face a big cutback when I left PwC. But at the same time, a few years ahead of leaving, we’d gone through a detailed (and dull) exercise of reconciling bank and credit card statements to figure out what we were really spending. And then for the 18 months before I left we managed our finances in a way that meant we were living on exactly what we’d be living on when I stopped work, ensuring a smooth transition.

When you’re establishing your expected expenditure, be sure to capture items you’ll no longer need when you leave work (the annual season ticket) as well as the things you’ll now need to pay for (medical insurance). Take into account the fact that expenditure tends to fall in retirement — by between a quarter and one third between the start of retirement and age 80 (see for example here and here). So your longer term expenditure needs should take that into account.

Don’t stress too much about long-term care. The data suggests that fewer than one in ten people stay in a care home more than six years. There’s around a 99% chance that you and your spouse need fewer than 12 years of care between you, at a total cost of, say, £1m. By contrast, 75% of people stay in care fewer than three years. So long term care, while admittedly expensive, has a likely cost below the value of most successful professionals’ homes. Given the low probability and high uncertainty of the cost, I’ve always viewed our home as the hedge against unexpectedly long care home needs (sorry kids!) rather than trying to save separately for it.

If you’re clear you’ll still be earning money after your transition then by all means factor that in as negative expenditure. We chose not to, because I wasn’t sure how my mindset might change after moving on and didn’t want to be locked into a particular earnings requirement.

Surprisingly few couples have agreed what they’ll provide for their children. Figuring this out is an important part of getting clarity on your own financial position. Certain items will be essentially fixed in timing and amount — like supporting them through university. These need to be factored into your expenditure plan. Other items, like help with a house deposit or a legacy during your lifetime or on your death, could be subject to affordability and hence could form one of your flexible goals.

It’s really important to get agreement on this issue so you can factor it into your plan and then put it to bed. Rather than letting it be a nagging source of anxiety.

The point when you move on from your main career is also a good point at which to review your wills, life and critical illness insurance, and any trust arrangements you put in place to receive workplace death-in-service benefits and the like.

This is an area where some good financial planning advice can repay its cost many times over in terms of peace of mind. You need to check that in a central scenario you’ve got enough.

A rough rule of thumb is that you’ll need 25x your initial underlying regular expenditure plus any one-off or temporary items like support for kids’ education, legacies and so on. This is based on the so-called 4% rule, which although very easy to criticise is a surprisingly effective rule of thumb for successful professionals.

Better still, get some financial planning support or build a spreadsheet using reasonable assumptions about future returns to check your sums add up.

When you first move on from your main career you want to be able to do what you want and live with freedom. No one wants to be second-guessing how much they’ll have to spend next year. We need to be able to plan our trips and treats with confidence. So it’s worth having enough cash to meet your target expenditure for the next two to three years, especially early on in retirement (taking account of any underlying base level of income that you’ve already secured).

These means you can carry on with your short-term plans with confidence, regardless of market gyrations.

By securing a base, we don’t have to worry about running out of money over the long term. By securing the short term we don’t have to worry about sudden changes to our lifestyle. The final step is to accept that over the medium term we have to be flexible. Our expenditure must rise and fall in line with markets. Our base level of income remains fixed in real terms, secured as above. But the excess needs to vary in line with our investment returns. So our investment strategy needs to balance the returns we’d like against the volatility in expenditure we can accept. This matching of investments and expenditure is essential for ensuring that we spend enough early in retirement while being sure we’ll never run out of money.

This requires a rules-based investment approach, with a predetermined percentage of your fund that you’ll withdraw each year to supplement your base of secured income. This will be variable as it’s based on the value of your fund at the time. Each year, a percentage of your fund is added to your cash pot that is funding the next three years of expenditure. In this way, any changes in available expenditure up or down are smoothed in over three years, giving you the chance to adjust.

It turns out that this approach is greatly superior to traditional retirement withdrawal approaches, removing the risk of running out of money and enabling expenditure that is normally much higher early in retirement. If you’d like more detail on how this works, you can watch my video on the topic.

Your wealth will be spread across pensions, ISAs, taxable unit trust or ETFs, residential property. You need a plan for how you’re going to withdraw money from these various pots in an effective way. This will vary a lot between different individuals, but here are some pointers.

Defined benefit pensions, state pension and property rental income (if you have it) typically form the first three layers of income. The question then is what you should access next, out of defined contribution pensions, ISAs or taxed investments.

You may hear from some planners that you should spend your defined contribution pension last. This is based on the extraordinary inheritance tax benefits of pension: tax-free if you die before age 75 and taxable at the beneficiary’s marginal tax rate if you die after this age (and, if your provider allows, can be paid out as a pension, enabling it to be spread across multiple tax years).

There’s something in this. But the inheritance tax treatment of pensions is so absurdly generous that it must be vulnerable to future changes in tax law. And leaving your children money when you die (potentially when they are in their sixties themselves) may be much less useful than giving them money in your lifetime when they are younger.

If you want to spend your pension on yourself, or at least in your lifetime, then the most efficient way to get it out is gradually: ensure that you take amounts that are below the higher rate band (up to around £50,000 a year currently or around £67,000 a year if you didn’t take tax-free cash at commencement). This approach minimises the tax you pay, over your life, on your pension assets.

Whether it’s better first to spend taxed assets or money from your pension depends on the tax rate you face on those assets and how long you’re going to hold them. If your taxed assets are subject to higher rate tax then it may be better to spend them first, even if this means that some of your pension income gets pushed from 20% to 40% in future. This is because for a higher rate tax-payer the cumulative tax cost, over a decade of investment, could be more than the cost of your pension shifting into a higher tax band. If your taxed assets are subject to basic rate tax (e.g. if they are in a the name of a spouse with limited earnings or pension income) then often it’s more tax efficient to take the pension first, up to the limit of the basic rate band and only then to sell taxed assets if needed.

Unless using your pension to minimise inheritance tax is your primary aim, it’s likely that ISAs would be what you draw on last. They are wonderfully flexible, offering tax-free returns but enabling you to withdraw them without limit at any time. It’s therefore best to save them for when you need them.

This is a complex area and these are just general pointers. If you’re not confident navigating the tax rules, this is an area where some good planning advice can pay for itself. Mistakes can be costly.

The challenges of supporting expenditure from your accumulated investments are very significant. It’s a point in life when everyone should consider whether they need an adviser. This could be an adviser to help give you comfort you’ve got enough or to help develop a withdrawal plan. It could be an adviser to help manage the investments on your behalf if you want to avoid the administration. Or you may feel that you could handle investments adequately yourself but want the comfort of knowing that there’s someone familiar with your situation who can help your partner if anything should happen to you.

I’ll be writing a separate article on choosing an adviser. What’s critical is that you are clear about what you’re looking for before you choose one and that you ensure that the service is designed so that you only pay for things you value.

These are the financial steps we followed as I approached the end of my time at PwC.

Because we’d designed and scenario-tested our plan using this approach, when markets crashed following the onset of COVID it was like water off a duck’s back. We knew there was no immediate impact on our plans, that our long-term base was not affected and that we’d have time to adapt to any changes in planned expenditure required over the medium term.

Being confident in the financial side of our transition has freed us from anxiety and enabled us to focus on getting the most out of our new life.