HOW MUCH?

“How much money do I need for retirement?”

A simple question asked by many clients of their advisors. The response should be… “What life style do you want to lead in retirement?” 

The answer from said client… should be…

“I want to live in the lifestyle that I have become accustomed in my present state.”

One could say that is completely dependent on what your wants and needs are. If your wants out weigh your needs then you will need a lot of money to retire on. If your needs are more important than wants you will need less retirement income. How much money you need to save for retirement is in part a function of how much money you will spend – and for how long.

So, what are the parameters for determining your retirement budget and the lifestyle you plan to lead.

Well according to Statistics Canada, the average Canadian household spent $68,980 in 2019 on consumer goods, an increase of 9.5% from 2016. Since nobody really lives in an “average” Canadian household and retirees have unique spending differences from the general population. Then let’s look at those numbers, the average household spending for the retirement population would then change to between $45,725 and $87,459, although spending net of income tax, insurance and pension contributions was only $36,339 and $65,086. These latter figures may be a better gauge of average spending on goods and services for the retired population.

Do we believe these numbers? 

Not Really!

Since Statistics Canada relies on the population to report their numbers so they can be compiled and published, I would suggest on that the average spending on goods and services for the retired population is likely on the low side. It’s no doubt though that many of Canada’s retired population will be well above these averages. As many have now entered retirement with a mortgages and other big-ticket expenses that were not of past retirees.

Trends during retirement

We will get to life expectancy shortly but let’s say you retire at age 65 and life expectancy is 90… then you have 9125 days to play with. 

What will you do with them?

Let’s see… I want to see the world, I want to golf more, I will volunteer, I will spend time with friends, look after grandchildren, go fishing, hiking, gardening, play cards with friends, join fitness groups, etc. These are things we hear all the time. They are things that generally happen.

So, let’s do the math… 

If you go away for one month a year travelling for five years that equals 180 days. If you look after the grandkids one day a week five years that equals 260 days and so on. With all the other activities our wish list we could keep yourselves very busy for 1825 days or five years. Yes, you will be very busy for the first five years guaranteed. You will also spend more money during that time because every day is like a weekend. Since you don’t have to work during the week you can spend money every day other than your days off. All of a sudden, this retirement business is expensive. You have to understand that you are living on a fixed income moving forward as the money you have saved is all you will have.

But not to worry at some point during retirement you start to slow down and move a lot slower. You realize that you are busier now in retirement than you were when you were part of the work force. So, you give up the volunteer work, the grand kids tend not to need us as much as they age, and travel becomes a permanent residence in a warmer climate for half the year. The next 1825 days we see the need to rest and this is when the savings begin. We have done it all… 

We made it! Age 75 – 3650 days (10 years) into retirement we figured out that it’s time to rest – now what.

Time will tell and that will be based on health.

Things to consider…

Real estate

Real estate is a huge consideration when it comes to retirement spending planning. There are a couple of reasons.

If you own an older home, obviously part of your budgeting needs to include ongoing repairs and possibly renovations. Whether you like it or not, large capital costs will factor into your retirement spending particularly when you own an older home.

If you own a vacation property like a cottage or a place down south, hopefully retirement means you can spend more time enjoying these properties – if you so choose. But if you spend less time, either because the cottage is tougher to get to or maintain or you’re travelling instead of wintering in Florida, a point comes where the financial cost of maintaining a valuable, though mostly empty piece of real estate needs to be weighed against the usage. Renting a cottage or vacation home may be better financially, although capital gains tax implications and family attachment to a secondary home need to be considered before selling.

Obviously, a home downsize or a sale of a second property can also inject capital into your retirement assets and potentially allow you to scale up retirement spending.

And if you rent instead of owning your home during retirement, that makes a big difference in terms of your long-term retirement spending. Owning a home can create a safety net for funding expensive long-term care costs in your 80s and 90s that doesn’t exist if you’re a renter.

Life expectancy

We often hear about the average Canadian life expectancy, currently 79 for men and 83 for women in Canada as of 2017 according to Statistics Canada. But these ages are simply representative of the average age at death across the Canadian population. This means Canadians who die at a younger age skew life expectancy downwards as compared to the age to which a retiree is expected to live. Also, that is an old number we do know that people are living longer now than they have in the past.

For perspective in 2021, a retired husband and wife, both aged 65, have a 50% chance that at least one of the two will live to age 94 and a 25% chance that at least one will live to age 97. The life expectancy of a 65-year-old man is 89 and of a 65-year-old woman is 91.

It’s not only how much you’re going to spend in retirement that matters for retirement planning purposes, but also, for how long. An earlier retirement or a longer life expectancy will both increase how much money you need to retire and be financially independent.

Summary

Nobody is average, but everyone is looking for some perspective. Take the above with a grain of salt.

Statistics Canada data suggests that spending on goods and services was $65,086 for couples without children and $36,339 for one-person households in 2016, but this includes Canadians across all age groups. Studies suggests average retirees in 2016 spent $31,332 per year on good and services, though this excludes any housing costs beyond utilities and property taxes. It’s also a consolidation of married and single retirees, suggesting the figures should be higher for couples and lower for singles, while adjusted by both to reflect additional home ownership costs or rent.

Studies found a 16% reduction in spending as workers moved into retirement, but other global studies have been found to show more modest declines in spending.

Spending may increase in the early years of retirement, but those who live a long life may not only have more years of retirement to fund, but are also exposed to the risk of incurring long-term care costs as they age.

Retirement planning is more art than science, but at least with some reasonable sense of what to expect with your retirement spending, you can develop a long-term retirement plan. I feel it’s prudent to budget to replace 85% of your pre-retirement basic living expenses, but some people will spend more or less depending on their personalized retirement and financial goals.