The most common and important financial moment in our lives is retirement.
Sure, there are other big landmarks along the way. But so much of the saving and investing we do is to support ourselves after we stop working.
This means that there are really just two stages in our financial lives: the “up” and the “down”, what economists call “accumulation” and “decumulation”.
First, we build our nest egg; second, we spend it.
We can certainly think about this through the lens of numbers. You’ve got, say, a $1 million portfolio and you need the cash flow it generates to cover your cost of living for several years.
Getting this right takes years of preparation and good decisions, but the maths isn’t terribly complicated.
However, treating the “up and down” as just a maths problem ignores another critically important dimension: Your psychology. Your mindset.
Retirement is as important a life transition as there is, touching deep-seated issues like identity, relationships and purpose.
Retirement is emotional in countless complicated ways. There’s a lot at stake here. Let’s touch on five of them.
Life satisfaction stems in no small part from the sense that we are working towards something and making progress towards it. In the “decumulation” phase, we’re no longer coursing towards a bigger and better portfolio. We’re just subtracting. It doesn’t feel great.
You’ve likely been committed to making smart investments and saving decisions for a while. You’ve been in the cockpit, in control of your decisions. They’ve not all been correct, but they’ve been yours. Well, now you’re just gliding. In fact, wonky retirement experts call the cash flow from your decumulation phase your “glide path” when we don’t sense we have as much control as we used to.
For many of us, our sense of identity and purpose is closely tied to work and professional achievements. Retirement can disrupt this sense of identity, leading to feelings of loss, lack of purpose, or a diminished sense of self-worth. The transition to spending down savings can be particularly challenging when it feels like relinquishing the productive and meaningful aspects of one’s life.
Humans tend to feel the pain of losses more strongly than the pleasure of gains. In retirement, the fear of running out of money – and just the awful feeling of depleting one’s savings – can create anxiety and reluctance to spend, even when it’s necessary. This fear can lead us to excessively frugal lifestyles and sacrificing enjoyment.
Finally, the transition to retirement can compel us to look back and ask: Did I do things the right way? Sure, that can be about our portfolios, but, really, it’s about our life decisions more broadly. It’s such a weighty topic.
Can we agree that none of this feels good?
Lack of goals, loss of control, changing identity, increased fear and regret all trigger negative emotions.
Even when the numbers add up – when you have confidence that your nest egg will support you – these negative emotions are commonplace and often unavoidable.
It should come as no surprise that retirement – often portrayed as one of life’s great accomplishments – can be a source of anxiety and depression.
Is there a solution to the “up and down?” If you’re looking for a fine-tuned algorithm or a crisp list of action items, probably not. After all, this is life and it’s messy.
However, we can work towards diminishing the impact of these factors in two steps.
First, let’s acknowledge that these are real concerns in the first place. That’s not always done in personal finance or financial planning, where maths overshadows mindset.
By validating these challenges – and to appreciate that many in or near retirement are grappling with the same things – we at least open a door to discussion.
Naming something is the first step to understanding and controlling it.
The second step is one of permission. It’s OK to go there – to discuss these with your loved ones or advisers or, perhaps, just to start, in your own head.
To give yourself permission to tackle the uncomfortable is a form of power and control, which we all crave.
Ultimately, an honest engagement with the “up and down” and prioritising mindset over maths creates the opportunity to better pursue a life well-lived.
Sam Instone is co-chief executive of wealth management company AES