Saturday, March 29, 2014

Income and spending in retirement?

When you retire, will your spending increase, decrease or stay the same? My spending decreased but different people will answer this question differently.

For most people, retirement means less income than they had while they were working.  As a result, most people assume they have to “cut back” on spending in retirement.  The big question is “will cutting back still mean retirement will be the best years of your life?”

Gross income is different than net income, Gross income is what you receive from your employer or your retirement income before taxes and other deductions are taken off your pay. What is left over is called your Net Income.

Although most people retire to less gross income, remember that less gross income may not actually mean the same drop in net income.

Remember that net income as a percentage of gross income is greater before retirement than in retirement because there are more deductions off pay while working.  It’s not just tax that is taken off your paychecks   There’s Canada Pension Plan, Employment Insurance, benefits, pensions, Registered Retirement Savings Program contributions, union dues, etc.  A friend of mine who was doing some planning for their retirement was surprised that their gross income while working turned out to be the same net income retirement.

Does spending decrease the older you get?

The first 5 to 15 years of retirement tends to represent the golden years or what I call the “Go-go” years.  This is a time when you may choose to travel more and have more fun because you physically have the ability to do so.

As you age and health tends to deteriorate, there tends to be less spending on discretionary lifestyle spending.  In the “Slow-go” years, you tend to travel less, drive less, and even eat less. You may not play golf or tennis as much and expenses related to socialization tends to drop as well.  Overall, many retirees (but not all) find that their spending in retirement actually decreases the older they get.

Spending on healthcare increases the older you get
Some people argue that as spending on discretionary lifestyle decreases over time, spending on healthcare tends to increase over time.  I can’t really disagree with that statement but the real question becomes which is bigger?  The drop in lifestyle spending or the increase in healthcare spending?

There is no question that healthcare expenses is a big concern for retirees.  In fact, many studies suggest it is the biggest concern that retirees have.  Right now, Canada still has a highly subsidized healthcare system and the financial burden is not as severe as other countries with alternative health care systems.

Believe me, I am not trying to minimize the concerns of the rising cost of healthcare but I do want people to think about their spending and expenses when planning for retirement to be as detailed and realistic as possible.

Most of us tend to see a decrease in spending as we move from the go-go years to the slow-go years into the no-go years.   It certainly does not always work this way but I find most people tend to limit their spending because they fear the worst.  They always worry that spending in retirement will increase due to healthcare but they don’t account for the decrease in lifestyle expenses as you get older.

Planning is personal
Be careful about over generalization, averages and rules of thumb.  The best retirement plan is the personal one that accounts for your individual needs and circumstances.

Some retirees are  impacted significantly by higher inflation and increased costs as they age.  But many retirees get to a point where their spending decreases to a point where they can’t spend all their income.  Some people get hit hard with healthcare costs but also others where healthcare expenses in retirement were well below expectation.

It’s impossible to accurately predict what will happen to spending in retirement but it’s still important to reflect on this issue and determine the impact increasing or decreasing expenses in retirement can have on your overall retirement plan. 

Thanks to Jim for the ideas

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