The last thing Canadians need to hear is advice to spend more money.
But that’s exactly what a select group of seniors should be doing. They’re spending below their means and potentially not enjoying life to the fullest in the prime of their retirement.
As visualized by actuary Fred Vettese of Morneau Shepell, this group is comfortable, not wealthy. He sees these people collecting Canada Pension Plan, Old Age Security and relying on personal retirement savings of $500,000 or more, rather than company pensions. In a recent column for The Globe and Mail, Mr. Vettese documented this group’s striking tendency to spend less than it can easily afford to.
Mr. Vettese himself is retiring at months’ end. I asked him for the top lessons he learned about retirement in his career and one of the things he mentioned was that people should know how much of their savings they can afford to spend after they retire.
Another lesson was that people should understand the difference between regular life expectancy and disability-free life expectancy. Here, we arrive at the cost of penalizing your lifestyle to conserve money for later.
Mr. Vettese said overall life expectancies have been steadily rising, but the stretch of life when we are healthy and free of disabilities has hardly changed. He said that a 60-year-old woman today has a good chance of living to the age of 90, yet the disability-free life expectancy is roughly 70.
A definitive measure of what a disability is doesn’t really exist, so there’s some inexactness to these numbers. But to Mr. Vettese, they argue for enjoying your money while you can.
“Take me, I’m 65,” he said. “If I’m lucky, I’m looking at eight to 10 years of a really active lifestyle where I can still do some exotic travel and spend time doing everything I want to do without any kind of limitations. After that, who knows? All bets are off.”
I recently wrote about the Rule of $20, which is designed to help people understand how much annual income their retirement savings will generate. The Rule of $20 says that every $20 you have in personal retirement savings will on average generate $1 of inflation-adjusted, pretax retirement income annually.
Clay Gillespie, managing director at RGF Integrated Wealth Management in Vancouver, responded to that column with an e-mail in which he criticized rules like this because they stoke fears of running out of money.
Based on his experience with well-off clients, people are needlessly conserving money in those prime retirement years before health problems start to emerge. “We do illustrations saying, okay, you can spend this much money per year and increase it by inflation,” he said. “But what we find after the first 10 years of retirement is that they are not spending nearly as much money as they could.”
Echoing Mr. Vettese’s observation about disability-free lifespans, Mr. Gillespie divides retirement into the “go-go, slow-go and no-go” years. If we assume retirees need the same income through all of these stages, then it makes sense to conserve money in the early years of retirement to ensure there’s enough for later.
But Mr. Gillespie said people spend less as they age. So much so that he’s dismissive of the idea that retirees will have to increase their income by inflation every year. “That’s hogwash – we find that people need to increase their income every three or four years.” The amount of those increases? About 2 per cent to 3 per cent should do it.
The cost of long-term care late in life has to be considered in managing your retirement income. But Mr. Gillespie said people may be able to use the equity in their home to pay for long-term care. He also noted that people in a long-term care facility generally have no other expenses to cover beyond their care.
Underspending in retirement isn’t a universal issue by any means. A column last week looked at a recent surge in the number of mortgages being set up by people between the ages of 73 and 93. Presumably, some of these seniors need to borrow against their home equity to meet their spending goals.
Some guidance from Mr. Vettese: If your personal retirement savings fall well short of $500,000 and you have no pension, then you’re quite correct to conserve your money.
Rob Carrick