Having a plan can help with the first issue. Whether it is something you’ve constructed yourself on a spreadsheet, or the product of an expensive visit to a financial advisor, you want to get a sound projection of what you can afford to spend to feel more comfortable tapping those savings.
Before the current mania for exceptionally low interest rates, a rough rule of thumb was that drawing down 4% of your capital per year in retirement was sustainable. Today the advice is more nuanced. Some advisors suggest that the sustainable rate is 3% or less. Artemis Investment believes that 4% is still possible, but only if 60% of your fund remains invested in equities. This is quite a big ask for many more cautious investors. Alternatively, if you are prepared to hold 40% in equities, a 3.5% withdrawal rate should be sustainable.
If you have sufficient financial flexibility to avoid drawing down on your investments in the aftermath of a market tumble, as happened last year, that can also make an enormous difference to your finances.
And you can channel savings into other assets that pay an income. This is one of the reasons why property remains a popular investment, notwithstanding the risk and the logistical challenges. Having at least some guaranteed income can help people feel more confident about treating their capital as money that can be spent.
Another form of income that’s often overlooked in the U.K. is the state pension. As many as a quarter of retirees, particularly women, fail to ensure that they receive the full benefit. The state pension increases in line with a complex formula that often sees it outpace inflation, more than maintaining its purchasing value. The full pension entitlement currently pays 9,339.20 pounds per annum.
Of course, one of the reasons that people hoard cash in their old age is because nobody knows how much elder care is likely to cost them. Ideally, you slump over your putter at a grand old age having just sunk a huge birdie putt on the 18th. Most people, though, err on the side of caution for fear of seeing out their final days in penury.
So if the government could make good on its promise to provide some certainty on care costs, the measures would very likely pay for themselves by freeing up excess savings.
And if all that fails to convince you to spend your hoarded cash, do it for the good of everyone else. Imagine the difference you can make by sharing your good fortune in these difficult times.
Stuart Trow is a credit strategist at the European Bank for Reconstruction & Development. He is also a pensions blogger, radio show host and member of numerous retirement, finance and audit committees.