How much money you need to save to retire is in part a function of how much money you will spend – and for how long.
Let’s try to identify some parameters for determining your retirement budget.
According to Statistics Canada, the average Canadian household spent $62,183 in 2016, an increase of 2.8% from 2015. Statistics Canada updates its Survey of Household Spending annually and maintains historical records.
Nobody really lives in an “average” Canadian household and retirees have unique spending differences from the general population. Perhaps a better glimpse into spending occurs if you focus in on the Statistics Canada data for couples without children or one-person households, both of which may be more relatable to retirees.
Average household spending for these two groups was $87,459 and $45,725 respectively, although spending net of income tax, insurance and pension contributions was only $65,086 and $36,339. These latter figures may be a better gauge of average spending on goods and services for retired couples and single seniors, although even then, couples and singles of all ages are included in these survey results.
I would suggest on that basis that average spending on goods and services for a retired couple of $65,086 and for a single retiree of $36,339 are likely on the high side. It’s no doubt though that many Canadian retirees will be well above or below these averages.
Sun Life did a study in 2016 called the Sun Life Retirement Now Report. They spoke to a good sample size of 2,006 Canadian retirees to determine how much less they were living on in retirement and most importantly, if they were happy. They also compared the retirees to 2,004 working Canadians.
They found that working Canadians spent, on average, $41,172 on food, housing, healthcare and taxes, compared to retirees who were only spending $31,332. These figures were a consolidation of both married and single respondents. As a result, the averages may be on the high side for single retirees and on the low side for married retirees.
This survey finding suggests a 24% decline in spending in spending in retirement, though because these figures include income tax, I find it can be a bit deceiving. If we back out income tax, the decline in spending on good and services was only 16%. I think even the 16% decline may be a bit overstated, given working Canadians often have children who drive up their cost of living.
You’ll note that the annual spending figures are significantly less than the Statistics Canada household spending figures above, mainly because the Sun Life housing costs only include utilities and property taxes, but not mortgage payments, condo fees, insurance, rent, renovations, repairs, etc. that are more extraordinary and personalized in nature. As a result, the Sun Life survey may provide a good starting point for retirees, but don’t forget to add home ownership costs beyond utilities and property tax to these figures to get a truer representation of retirement spending.
It’s also worth noting that the study found that 90% of married retirees surveyed felt positively about life in retirement, compared to 85% of divorced, separated or widowed retirees and 84% of single retirees. This may suggest that the retirement spending data obtained is indicative of a “happy” retirement for most retirees surveyed.
Trends During Retirement
David Blanchett of Morningstar Investment Management wrote an article in the Journal of Financing Planning in 2014 called Exploring the Retirement Consumption Puzzle. In it, he notes the existence of what he calls the “retirement spending smile”, whereby spending tends to decline in the first half of retirement before rising in the second half (on an inflation-adjusted basis). As a result, the spending pattern may resemble the shape of a “U” or a smile.
The increased spending in the later years tends to arise, not surprisingly, from increased medical expenses, but also transportation costs, help around the house and other outlays that are directly related to aging.
I wrote about this as well in a 2017 article in the Financial Post called Why You Should Think ‘Smile’ When Planning Your Retirement Spending Path.
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, 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.
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.
For perspective, a retiree 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.
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. Sun Life’s study 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.
The Sun Life study 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 decrease 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 100% of your pre-retirement basic living expenses, but some people will spend more or less depending on their personalized retirement and financial goals.