First Monday Magazine, Sarnia - July 2016
Are you or your folks retiring soon? Do you know what kind of an income level may be needed to venture from active working years into retirement? There are professionals who can certainly help you determine initial and continued income estimates framed by your exact circumstances but in my case, despite being a financial planner, I always found it awkward discussing my mother or my in-law’s retirement income needs with concerned siblings and of course, with each of them! My folks have long been retired. They have enjoyed relatively good health and have been blessed with the financial stability to enable them to choose where it was that they would live and to do the kinds of things that they would like to do; you know, those things that are optional in life and cost a little money. The thing is, as concerned children, we often find ourselves wondering what the income level is that will they need in the future? While no one has a crystal ball and a sizable emergency fund should always be established as a edge against the unknown, the actual income level required as we age may surprise you!
In June, the reputable C.D. Howe Institute tabled a study that dove into this matter. In this extensive report they concluded that the spending habits of retirees in Canada decline in real terms with advancing age. This somewhat counters the intuition we have to want an indexed pension or an income that rises with inflation. It’s not that inflation isn’t a factor to be concerned about; it does impact our needs; rather it is the reduction in actual spending that may eventually negate a need for an indexed level of income as we age. They say that our decline in real spending starts at about age 70 and accelerates at later ages. The average spending pattern starting from the average onset of retirement (age 62), to age 85, looks like an upside down hockey stick, rising for a while and then sloping down gently and continually all the way towards life expectancy. What are the reasons? Physical limitations later in life make some of the planned and more expensive activities we do like travelling and enthusiast type activities reduce. Add to that some reductions in the frequency of eating out over time and generally, as we age, people spend progressively less on consumables. The tipping point seems to be between the ages of 70-74.
While this research may eventually influence the degree of future indexing on the few remaining, largely public based defined benefit pension plans, we should all be pleased that our universal retirement benefit payments, OAS and CPP are indexed to the consumer price index (CPI). It’s just that now, we should also be a little comforted by the knowledge that there likely comes a point in time in retirement where our income needs may actually reduce and eliminate the need for us to draw increased levels of income from our limited personally accumulated assets and actually start to catch up, or start to be net savings in our very, later years of life. Only time will tell.