While we are working, we earn money; we spend some of that money, and save what’s left. When we retire, we spend the savings we have accumulated. Simple isn’t it?
We can afford to retire when we have saved enough to finance our spending needs in retirement. If you don’t save much you will have to work longer before you can consider retirement. With those simple thoughts in mind, two things recently caught my eye.
The first came from the USA. It was an infographic produced by Visual Capitalists showing the make-up of wealth by net-worth bands derived from 2016 data published by the Federal Reserve of Consumer Finances (2016).
For those who have a net worth of $10,000 their residential home was by far the biggest component of their wealth but this was closely followed by the value of their car. Pension wealth came third. I take it that this group are younger, therefore are highly mortgaged, need a car for commuting and or family reasons, and their pension savings are just beginning.
Move up to $100,000 and the residential home is by far the biggest value, followed by pension wealth at approximately half the wealth. The value of their car comes a poor third.
Now move up to $1m of wealth (roughly £720,000) and something interesting happens. Pensions and residential home as a proportion of wealth come equal first; but ‘business interests’, real estate and mutual funds are becoming significant proportions of wealth. Business interests are defined as partnerships or closely-held companies. Direct ownership of stocks and shares come under another category.
As you move up through $10m and beyond ‘business interests’ become the largest component of wealth with residential property being squeezed and cars becoming a minor component of wealth.
With my inquisitive mind, my immediate reaction was what a similar Infographic would look like in the UK. Firstly, I suspect that housing wealth would be a greater proportion for the higher wealth bands in the UK. However we must remember that in the UK there are regional variations.
In the same week, the Office of National Statistics published its report on family spending in the UK for the financial year ending in 2017. There are many takes on this report which include a breakdown of spending by age groups. What the age breakdown does tell us is that those between 65 and 74 spend more on recreational and cultural activities than any other age group in amount, and it accounts for almost 20% of their income,.
The reason I like these surveys is that they help paint a picture as to how people live their lives and what their priorities may be. The survey I would like to see would, for the UK, combine the outputs of the two. What is the asset distribution by tiers of wealth and age? How much do they spend and what do they spend it on? Preferably, with built in regional differences. But we must interpret what we have in front of us.
Let’s go back to the American data; those with the equivalent of £700k of wealth have on average significant business interests. In the UK due to house prices being greater than in the US I suspect we would still see the residential home as being the far greatest proportion of wealth. Pension wealth will be skewed to those who have significant defined benefit pensions. Among the rest of the population do we know how quickly business wealth is growing? If it is going to be converted into retirement income, this completely changes when and how the components of wealth are used in retirement.
Let’s look at an example – Joe, who may already exist. He is aged 65, about to retire, and lives in a house worth £400k, with no mortgage; his business interests are about to be sold for £250k cash, and he has £50k in his pension. His income from his business was £60k a year. What retirement income can he safely draw? When should he draw his pension? Will he have to call upon his housing wealth to maintain his living standards?
But this is definitely where no-one is average. Joe may get a lot of enjoyment from a low-cost recreational activity, such as oil painting. On the other hand he may have put so much into building his business that he has a bucket list of places to go and things to do that can never be fulfilled. Until you have met him you will never know.
The data I have referred to is interesting in that it informs. It helps raise the issues that need to be considered when talking to clients. Retirement income planning is an individual thing. There is only one set of data that is important, that which relates to the individual we are advising. Until we meet Joe we can only guess what his retirement will be like and what his priorities are.
Bob Champion is chairman of the Later Life Academy (LLA)