What ARE Retirees ACTUALLY Spending In Retirement?
What ARE Retirees ACTUALLY Spending In Retirement?
The Surprising Average Income of Retirees in Canada, You’ll Never Guess How Much Money Retirees Really Spend!
How Much?
The top questions I consistently receive from readers and comments on my YouTube channel, revolve around retirement income needs. Every year, countless individuals reach out to me seeking advice on their retirement plans. They’re eager to understand how much income they’ll need once they retire.
It Depends…
Now the short answer is it depends on lifestyle, and while many have a rough estimate of their current expenses, they’re curious about the average expenditure of retirees. In this article, I’ll dive into data to shed some light on this topic. Additionally, I’ll draw from my experiences with clients in my practice to, try to give you some insights into the typical retirement spending patterns we encounter. I will also walk through some valuable tips on managing retirement income and preparing effectively for your golden years.
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Retirement Has Gotten Pricey!
In recent years, inflation has surged, prompting a greater need for money. As a result, some individuals planning to retire have opted to work part-time to earn extra income. Rather than immediately revising their financial plans, they choose to extend their working years. Therefore, as retirement approaches, it’s a really good idea to have a sense of your current spending habits.
Now, I understand that budgeting might not be your favorite thing to do. It’s actually quite common for people not to have a budget — as only 5% of individuals preparing for retirement sit down and work out a detailed list of costs. But even if you’re not into budgeting, it’s still important to have a general idea of your monthly spending, even if it’s just a rough estimate within $500 to $1,000. Many experts suggest that during retirement, you will likely spend around 70 to 80% of what you were spending before. So, if you don’t have a budget, you can stick to that range, it’s a good guideline to follow.
Your Goal should be closer to 100%…
Getting close to maintaining 100% of your pre-retirement income is ideal, especially during the active phase of retirement when you’re enjoying life to the fullest. By sticking to a plan, starting with a solid foundation and then gradually increasing it, you can sustain your lifestyle without the extra expenses associated with working, like commuting costs.
BUT FIRST!
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So What Is The Average?
Well, a 2021 Canadian income study, found that the average after-tax income for retired families in Canada was $69,900, while for individuals it was $31,400. I found these numbers, specifically the lower one for individuals a bit low.
Looking at the data, I noticed a significant gap between the average income for individuals and households, with $69,900 for families and $31,400 for individuals. This raised some questions for me as it seemed quite disproportionate, and I couldn’t pinpoint the reason for this discrepancy when I really looked at the data, but based on our experience in working with clients, we typically don’t see that a wide gap. In reality, if a couple needs around $60,000, an individual would likely require around 75% of that amount, approximately $45,000 to $50,000. So, seeing a spread of $31,400 to $69,900 is somewhat concerning.
Now, the question arises: Do you really need that much money in retirement? Data from Canada suggests that the typical household spends about $60,000 annually, even in retirement. You might be thinking, “I don’t spend anywhere near that,” or perhaps, “I spend much more.” This is where our experience working with clients comes into play.
Here Is What I Found…
In my line of work, where I’ve completed hundreds if not thousands of financial projections for clients in many different provinces, I have seen that our average household, whether it’s an individual or a couple, typically spend around $7,000 to $10,000 in after-tax expenditures each month. This is a very common figure we encounter. But most of my clients tend to fall within the high-income, high-net-worth brackets, which may skew our average higher than when compared to the national average in Canada.
Now, its important to note we do encounter a range of client needs, from those requiring only $3,000 to $4,000 per month to others requesting higher amounts like $15,000 to $20,000 per month after taxes. However, focusing on our average, our clients generally fall within the $7,000 to $10,000 range per month during the active phase of retirement.
Let’s See What they Spend it On…
Let’s take, for example, someone needing $6,000 per month, totaling $72,000 annually during the active phase. This may decrease to around $5,000 per month or $60,000 annually, and then further down to approximately $4,500 per month as they transition into different phases of retirement. Now, let’s dive into where these expenses are allocated.
Housing
Housing costs generally comprise about 35% to 40% of total spending in retirement. Typically, this retiree will allocate about $15,000 to $20,000 annually, if not more, towards housing expenses. However, this can vary based on factors such as mortgage payments versus owning a house, or living in a condo with associated strata or HOA fees.
Transportation
Transportation accounts for approximately 15% of the budget, ranging from $7,000 to $10,000 annually. This includes vehicle ownership expenses such as insurance, gas, and maintenance, as well as travel-related transportation costs.
Transportation expenses can add up significantly, as evidenced by the costs associated with vehicle ownership. So, if you find yourself entering retirement with multiple vehicles, it could be worth considering downsizing to minimize unnecessary expenses.
Healthcare Gets Pricier As You Age
Another significant expense in retirement is healthcare, typically amounting to 10 to 15% of your retirement income. Allocating approximately $3,000 to $5,000 annually for healthcare expenses in Canada is advisable. Keep in mind that healthcare needs can vary from year to year, with some years requiring minimal expenses and others necessitating additional costs for issues like dental care. Although we do have a new national dental plan, more on that in future articles.
Sustenance And Warmth
Food and utilities are also significant expenses in retirement, typically accounting for 10% to 15% and 5% to 10% of your retirement income respectively. With these expenses factored in, you can expect to allocate a substantial portion of your budget — just to your basic necessities.
Travel and Entertainment
Let’s not forget about travel — a notable expense that adds enjoyment to retirement but requires careful budgeting as well. However, on the long list of potential costs this one can be significantly reduced if necessary.
Try To Do A Basic List Of Expenses and Spend Earlier
It’s important to establish a baseline for your retirement income needs. Start by calculating everything you require, then build upon that foundation. If you have a surplus of money beyond your needs including travel and entertainment, consider building up cash reserves for other things. This approach allows for more leisure activities, like additional travel, while you’re still able to enjoy them. Keep in mind that as you age, health concerns may limit your ability to pursue these interests, typically occurring around your early 70s. So, plan to front-load your retirement savings to make the most of your active years, while ensuring you have sufficient resources for the later stages of retirement. Another thing that happens as you age is that travel insurance becomes more and more expensive. This makes sense as the likelihood of something happening while abroad increases as you age. You may not have the appetite for high travel insurance premiums later. Good idea to get your travel in while relatively young and healthy in your early years.
75 and Later…
As you move further into retirement, your expenses typically decrease. While there might be occasional health-related costs that require more substantial funding, having a home can serve as a financial fallback. It’s crucial to discuss these scenarios with your investment advisor portfolio manager to understand how to navigate potential large expenses down the road. Tax planning is also a critical aspect that many overlook. During your working years, taxes were probably deducted from your paycheck, with limited opportunities for additional planning. However, in retirement, there are numerous tax planning strategies available, such as optimizing withdrawals from retirement accounts like RRSPs and leveraging charitable donations.
Plan For Tax Liability
In retirement, tax planning becomes a crucial aspect that many overlook, yet it offers significant opportunities for tax deferral and optimization. While you were working, your income typically came from one source, and the taxes that were deducted were pretty straightforward. However, in retirement, you will likely have a multitude of income streams, ranging from CPP and OAS to investment accounts and pensions, totaling as much as 15 different sources for the typical household. How you withdraw from these sources and manage withholding tax can significantly impact the amount of after-tax income you receive and the taxes you owe to the CRA. Unfortunately, many retirees overlook this complexity and end up paying unnecessary amounts in taxes, sometimes totaling thousands to tens of thousands of dollars each year. Wouldn’t it be better to pay less tax and keep more money in your pocket? That’s where strategic tax planning can make a significant difference.
When To Get Paid Matters…
In retirement, income can come from various sources, including government benefits like CPP and Old Age Security (OAS). The flexibility to adjust these benefits based on your needs is crucial. Deciding when to start taking CPP or OAS and how they fit into your overall income strategy requires careful consideration. Additionally, many retirees have accumulated RRSPs over time, providing another income stream that you can control in terms of timing and amount of withdrawals. However, the choices you make here also affect your tax liability and the amount of money you have available for spending after taxes. For those in lower income brackets, there may even be opportunities to qualify for additional benefits like GIS (Guaranteed Income Supplement). We often help clients optimize their income strategies and maximize their benefits.
While GIS can provide additional income for those with lower incomes, it’s essential to understand the long-term implications. Attempting to qualify for GIS through strategic income manipulation often results in higher taxes down the road. In many cases, clients end up worse off financially in the long run. It’s crucial to discuss your options with your investment advisor portfolio manager to determine the most suitable strategy for your situation. Additionally, retirement income may include pensions from employer-sponsored plans, such as defined benefit or defined contribution pensions. These plans can significantly impact your overall retirement income and tax situation, making it essential to consider them in your retirement planning.
What Kind Of Plan Do You Have?
Understanding the distinction between defined benefit and defined contribution pensions is crucial in retirement planning. I actually wrote an article on how you can identify the type of plan you have in Canada. But here is a quick way of finding out: With a defined benefit plan, the benefit you receive is predetermined, typically based on factors like years of service and salary. In contrast, defined contribution plans allow you to control how much you contribute, with your eventual payout dependent on factors like investment performance.
Additionally, personal savings in accounts like savings accounts, tax-free savings accounts (TFSA), and other investment accounts can provide additional sources of retirement income — sometimes TAX-FREE income. These accounts offer flexibility in terms of when and how much you withdraw, allowing you to optimize your tax situation and overall financial strategy throughout retirement.
The Bottom Line
As retirement approaches, it’s common for households in Canada to hover around the $60,000 to $70,000 income range. While this may vary for individuals, it’s a ballpark figure for many. However, merely aiming for average isn’t enough. As you approach retirement, it’s essential to develop a strategic plan rather than blindly withdrawing funds. By strategically timing and selecting income sources, you can optimize your tax situation and maximize your retirement income. Take a deeper dive into your spending habits and income sources. Consider how you can optimize your finances to put more money back into your pocket after taxes. After all, you’ve worked hard to build your nest egg — now it’s time to make the most of it in retirement.
Did you know that navigating the uncertainties of the markets and your finances is generally smoother with the support of an investment advisor or portfolio manager? Studies consistently reveal that individuals who work with investment advisors and portfolio managers tend to have up to three times higher net worth on average, but that’s not all, there’s a significant impact on overall well-being, with those who seek professional advice exhibiting higher levels of happiness and lower anxiety. Having a guiding hand through the financial landscape proves beneficial not only in terms of monetary outcomes but also in fostering a sense of security and contentment, making the challenges of an uncertain year more manageable with professional assistance.
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Have Questions? Contact us!
We’ve assisted our clients through every stage of life. Even when you’re not aware that something might impact your financial future, it likely will to some extent. Engaging in a conversation with your investment advisor about any financial changes is an excellent approach to keeping your financial goals in focus.
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Joe A. Macek, FMA, CIM, DMS, FCSI
Investment Advisor, Portfolio Manager
iA Private Wealth
Toll Free North America: 1–888–324–4259
Email: macekadmin@iaprivatewealth.ca
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This information has been prepared by Joe Macek who is an Investment Advisor Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
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