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moneysense.ca, 23/05/07
Spending Patterns in Retirement
The StatsCan data referenced in Fidelity’s study, which shows that retiring Canadians would need to replace 75% to 85% of their pre-retirement incomes, is available online. Unfortunately, I couldn’t find support for the assumption that consumption levels remain the same in retirement as in working years.
The StatsCan data breaks down households into three categories based on the age of the reference person: (1) 55 to 64 [we'll call pre-retirees] (2) 65 to 74 [retirees] and (3) 75 or over [seniors]. The study finds that incomes dropped 34% between pre-retirement and retirement and a further 27% between retirement and senior years. But, expenses also dropped 30% between the first two groups and a further 28% between the last two. The study concludes that:
As households age, income drops steeply because of loss in earnings whereas the drop in personal consumption is more gradual.
It is difficult to say if lowered expenses are a result of reduced income or due to lifestyle changes. However, it is clear that total spending on consumption does not remain the same in retirement. Perhaps the critics are right in claiming that Fidelity has a vested interest in urging Canadians to save more.
moneysense.ca, 23/05/07
I think the assumptions that went into the conclusion that 80% of pre-retirement income is needed for retirement are similar to the assumptions we all make about what we need for retirement.
Things like investment returns, inflation etc are such wildcards that no one can say for sure how much you need to save now.
That said – when I do my retirement planning I don’t have “sales” in mind to bias my assumptions.
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Looking at my retired parents, who are in the middle class, I had a hard time believing Fidelity’s findings. My father once said to me that he doesn’t know what to do with his money so he buys out his 3 kids’ mortgages and we pay him back at 0%.
Of course, even if you did find stats indicating that that consumption levels stayed the same, you would really need to determine what happened to their standard of living.
For example, if a couple with pre-retirement income of 100k (to make my math easy), retired with an income of 85k but were now able to travel more and join a golf club, Fidelity might conclude that they “needed” 85% to retire.
Love the CC site.
So true Dave. As the saying goes “maintaining pre-retirement lifestyle”. Well, 2 leased cars and large purchases, etc.. maybe a working life requirement but is hardly a retiree requirement.
Regardless of employment status, we all need to decide daily between “wants” and “needs”. Sure I’d love to have a 42″ plasma TV and a HDTV subscription, but is it a need? Shelter, Clothing, Health and Food are needs but entertainment and diversions?
I didn’t read the StatsCan report but I wonder if it addresses the potential for inter-generational spending differences? I believe my grandparents’ generation to be more frugal to begin with… even my parents who grew up in rural areas rarely travel and are unlikely to do so even when they do retire… I think it’s highly likely that our generation, having gotten more used to travel etc. is going to spend more in our retirement…
Just by removing long-term savings, RRSP contributions and rent, I’d be below 60% of my pre-tax income. And obviously, that would maintain exactly my current lifestyle. Obviously if I wanted to go on long vacations every year I’d need more money, but then if I wanted fly everywhere on a private jet I’d need even more money. Like, probably 300% of my current income (or more). How much is enough? As soon as you’re talking about adding expenses in retirement that you didn’t have while working, it can hardly be called maintaining your lifestyle.
To Dave B: I think the one flaw in the calculations is that we spend money with after-tax dollars.
So, your example of 100K income is really only maybe 60K of after-tax cash-in-hand. I would say that needing 80% of the 60K of after-tax cash-in-hand would sound at the high end of reasonable as it would be about $48K (roughly $4k a month).
Since the definition of retirement is not working for an earned income, then the tax rate on $48K is much lower, especially if much of that income is derived from tax-advantaged sources (like REIT distributions being classified as “return of capital” and not subject to tax until the investment is sold, or qualified Dividend Income). So, it all depends upon your asset mix. However, for reference, at an 8% return, to make $48K would require a portfolio of at least $600K in size.
Figuring out spending in retirement might make sense for someone close to it, but for younger folks, who knows what spending will be like 30 years from now? I figure that if we simply contribute the maximum to our RRSPs (or pay down the mortgage), by the time we are close to retirement, we should probably be okay.
I did some reading regarding the issue of retirement spending, and found a wonderful article that looked at exactly where retired people were spending their money, as compared to working people. The article is here: http://ideas.repec.org/h/sls/secfds/10.html
Here’s the quick summary: Retired people typically have far smaller incomes compared to working people (around 50% of the average working income). They spend a lot less money than when they were working, mainly because they don’t have a mortgage or children in the house.
The quote from this article that blew me away: “Fully retired senior couples save, or give away, almost 20 percent of their after-tax income. Fully retired unattached seniors save, or give away, more than 10 percent of their after-tax income. ”
It seems that retired people, on average, aren’t frugal because they have to be – it’s because consumption simply decreases in retirement. If retired people can afford to put 10-20% of their money into savings or gifts, clearly they aren’t having difficulty affording things that they want to buy or do.
Bottom line: If most seniors can have only 50% of their pre-retirement income and still manage to give away or save 10-20% of that income, then it makes no sense whatsoever to convince people that they’ll need an income replacement ratio of 75-85%. All that will likely do is:
1) increase the money earned by financial services companies, and
2) reduce the amount of money available during the prime working years by far more than is needed for a “comfortable” retirement.
The study I linked to above uses actual StatsCan data to back up its conclusions, unlike the Fidelity “study” that bases its conclusions on hypothetical situations.
George: Thanks for the article. I think it has enough material for a post.