The reality of living on a pension is taking new retirees by surprise
The reality of living on a pension is taking new retirees by surprise, with many under-budgeting their first five years of retirement and overspending by an average of £6,500, according to LV=. This is leading to a surge in older retirees taking out new credit or extending previous credit commitments.
Amongst pensioners six years or more into their retirement, 33% have taken out a credit card, one in 10 (10%) have taken out a loan and a similar number (9%) have not yet paid off their mortgage, according to the research.
The average new retiree aged 65 to 70 – typically the first five years of retirement – will make the most of their new-found freedom and dip into their nest eggs to the tune of almost £33,000 on ‘non-essential purchases’, such as electronic goods, foreign holidays, going to the theatre and eating out. This is almost £900 more a year than the current State Pension pays out. This means that the average savings pot of a retiree (£38,000), excluding any pension, will last just six years, despite the average retirement lasting 17 years.
During the average year, a new retiree will spend £1,280 on holidays, £1,814 on recreational activities including going to the theatre and museums, and £900 on dining out as they make the transition to a life of leisure. In fact, in the first five years of retirement, the average person will spend 20 nights of the year on holiday – a significantly higher number of nights than any other age group, according to the Living Costs and Food Survey (LCF) which collects information on spending patterns and the cost of living by age, carried out by the Office of National Statistics.
When interviewed by LV=, a fifth of people (22%) over 50 and still working say that they will take a luxury holiday when they retire, 15% will purchase a new vehicle, 12% will take a cruise, 8% will pay for property renovation and one in twenty (5%) plan to buy a property abroad.
Yet this spending could leave retirees at risk of having little money left for their later years, forcing them into a life of frugality. Almost a third (32%) of retirees entering their sixth year of retirement said they have had to significantly cut down on spending to avoid running out of their savings, and more than a third (34%) worry that they will run out of savings. One in five (20%) strongly regret overspending during their first few years of retirement.
This peak in spending is in part thanks to many retirees prioritising ‘having a good life and having as much fun as possible’ (32%), believing they have earned the right to spend after working for many years. As many as one in ten retirees buy themselves a ‘retirement’ present, and one in five (22%) say they simply want to treat themselves.
While retirees started to wind down once they left work in previous years, today’s retirees quite rightly want to make the most of the free time they suddenly have. It’s great to see that people are enjoying themselves in retirement; however, these numbers highlight the need for retirees to ensure they have financial flexibility in retirement. The average retirement is now 17 years – much longer than past generations – meaning that their lifestyle and associated costs are likely to change over this period. For this reason, it is important that they consider structuring their income in a way that allows them to adapt to their changing needs.
All research unless stated otherwise was conducted by Nelson Research for LV=. Original survey data was used in conjunction with The Wealth & Assets Survey 2012, extrapolated to 2013 on basis of 2006–2010 trends, the Expenditure and Food Survey 2011–2012 extrapolated to 2013 on basis of 2008–2011 trends, the Institute Fiscal Studies, house prices 2005–2013.
Additional research was conducted by Pure Profile Research. Pure Profile questioned 2,003 adults online aged 50–80 in GB in February 2014.
Expenditure and Food Survey also known as the Living Costs and Food Survey (LCF), ONS 2011 extrapolated to 2013 on basis of 2008-2011 trends
Includes the average cost spent on foreign holidays and UK holidays based on two retirees going together, according to the Expenditure and Food Survey or LCF 2011–2012 extrapolated to 2013 on basis of 2008–2011 trends
Includes the average cost spent on recreational services, books equipment for sport, according to the Expenditure and Food Survey or LCF 2011–2012 extrapolated to 2013 on basis of 2008–2011 trends
Includes the average cost spent on alcohol, eating out and drinking out based on two retirees dining together, according to the Expenditure and Food Survey or LCF 2011–2012 extrapolated to 2013 on basis of 2008–2011 trends