Creating a Capacity for Life’s Perks

Can a client’s small weekly habits be more impactful than the technically excellent planning and advice we give?

I am between meetings and pop to a national chain of coffee shops for a hot chocolate with all the trimmings… £4.15. It is delicious but £4.15, when did that happen? I am regularly on the road and wouldn’t hesitate to purchase a hot drink (or 2) and with many of my working days being long, it would also be commonplace to eat out at least once a week but not as a treat, just out of sheer convenience.

A habit I have created (at least subconsciously) over the years is to expand numbers to a yearly amount and compare it to what else I would have preferred to spend that money on. On this occasion however, I expanded the numbers and thought about my role as a Financial Planner “with all the work we do in research, analysis, costs, performance, volatility, sustainability, capacity for loss, Monte Carlo…etc, could something as simple as a few hot drinks and a meal out have a greater impact than the hours spent planning, analysing and implementing?”

I couldn’t help but explore this further.

Here are my favourite clients:

Mr and Mrs Example, 60 years old. They have just retired, will receive a full state pension, have exactly £250k each in a private pension and spend exactly £40,000 a year which will rise perfectly with inflation and remain exactly this amount for the rest of their days. Their pension funds will grow exactly 1% above inflation after fees have been deducted.

So, its clear its not exactly a real-life situation but to understand the impact of behaviour, I wanted to use as simple a scenario as possible with few moving parts. Here is their liquid asset position assuming they drawdown on their pensions:

Age when they run out of money – 77 years and 5 months.

Scenario 1:

What is the impact of -1% on investment returns, whether this is 1% extra costs or 1% under-performance?

Age when they run out of money – 76 years and 0 months.
This has decreased the sustainability of the retirement income by 1 year and 5 months.

Scenario 2:

What is the impact of a 10% unrecoverable fall in their investment on day 1 of their retirement?

Age when they run out of money – 75 years and 3 months. This has decreased the sustainability of the retirement income by 2 years and 2 months.

Scenario 3:

What is the impact of an unaccounted 3 coffees and meal out per week?

Let’s quantify this first. There will be some regional differences in coffee but assume £3.65 per drink therefore £21.90 per week.

According to Statista, the average Brit spends £25.14 per meal out (and the average Brit eats out 1.5 times per week) so for Mr and Mrs Example, a total of £50.28 per week.

Age when they run out of money – 74 and 7 months. This has decreased the sustainability of the retirement income by 2 years and 10 months.

How about a ‘Capacity for Extra Nice Things’?

Our clients’ habits and behaviours are likely to have a far greater impact on their lifetime financial position and the sustainability of their income in retirement than market volatility, 1% higher costs or 1% poorer performance. What should we do about this (if anything)?

Personally, I like to start the initial cashflow forecast (draft plan) with an expense called ‘The Unaccounted’ – the difference between what they say is being spent and what is being spent. In my experience, the conversation about this gap often reveals the spending that is most important to the client which make their life more enjoyable – things they want in their life forever.

How do you engage in conversations about behaviour and spending habits? How do you motivate change if needed? How do you include this in the planning you do? Is it reasonable to think that this could be picked up with a detailed spending analysis? Should we just be creating extra wriggle room in the monthly income?

How about a ‘Capacity for Extra Nice Things’ alongside your ‘Capacity for Loss’ section? What is the impact of £100 per week, £200 per week, £300 per week overspend?

However you choose to do it engaging in conversations about behaviour helps the client to feel understood, they appreciate the constructive challenge, it builds trust and respect but most importantly, the client gets to live their life knowing their lifestyle is affordable and sustainable.

That’s a great outcome for all.