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Spending Patterns In Retirement

When planning for retirement, one of the most difficult and critical estimates you must make deals with your level of spending in retirement. Do you base it on your family's income today? Or, do you use your current spending as a guide? And, what percentage do you use - 100%, 80%, 70%, 50%?

Learn from past retirees

According to Statistics Canada, the average age of retirement has climbed from 61 in 2005 to 63 years of age in 2015.

And a recent Bank of Montreal (BMO) study (June 2015), found that retired Canadians spent, on average, $2,400 per month ($28,800 per year). Their monthly expenses included, on average:

  • $668 for housing
  • $581 for living expenses such as bills, clothing and transportation
  • $442 for food, including groceries and eating out
  • $282 for travel
  • $167 for entertainment
  • $151 for medical expenses

According to the study, 55% of Canadians have spent large amounts (roughly $10,000 or more) on single items in retirement. The most expensive ways retired Canadians have spent their money include:

  • 41% purchased a new vehicle in retirement
  • 22% made major renovations to their home
  • 11% gave a large sum to family members

BMO also asked retirees - What surprised them the most when they retired? They said,

  • 37% said they didn't have enough time in the day to do everything they would like
  • 25% said they should have saved more for retirement, despite 
  • 25% saying they were spending less money than they thought they would
  • 23% said they were traveling less than they thought would
  • 21% said their health declined sooner than they expected

In addition, 67% of retired Canadians spend their time with friends and family. 60% pursue hobbies, 49% travel and 29% volunteer or do board work.

Russell Investments view

For those of you that like a quick and simple approach, Russell Investments uses a novel approach to estimating a retiree's income and investment needs. They call it 'Russell’s Retirement Rule of $20'

"Russell’s Retirement Rule of $20 is a quick approximation of retirement funding that works in two ways.

  1. Multiply a desired amount of annual income by $20 to arrive at an approximation of the required retirement savings, or
  2. Given an amount of retirement savings, divide by $20 to arrive at an approximation of the annual income that can potentially be generated. Results will vary based on a variety of individual circumstances."

Their approach is based upon the following basic assumptions 

  • Net of fees portfolio return is utilized as the interest rate proxy
  • Annual payout is indexed to inflation (assumed to be 3% for the duration)
  • Asset allocation post retirement is 35% equities, 65% fixed income
  • Planning entity is a married couple (older spouse aged 60)
  • The $20 is assumed to be money within a registered account

This is a fairly new approach and time will determine if the $20 Rule works for Retirement Planning.

Morneau Shepell's view

Morneau Shepell is the largest company in Canada offering human resources consulting and outsourcing services. Morneau Shepell is the leading provider of Employee and Family Assistance Programs, as well as the largest administrator of pension and benefits plans. 

Established in 1966, Morneau Shepell serves more than 8,000 corporate clients, ranging from small businesses to some of the largest corporations and associations in North America. With approximately 3,000 employees in offices across North America, Morneau Shepell provides services to organizations across Canada, in the United States and around the globe.

Morneau Shepell has extensive experience and knowledge when it comes to helping people make the transition into retirement and their recent studies have demonstrated that retirees typically need 43% of their pre-retirement income to fund a financially secure retirement - not the commonly accepted 70%

From their January 2011 publication - Vision,

Last time, we showed that a working couple with two children and household earnings of $100,000 could maintain their lifestyle in retirement with income of just $51,000 a year (51%) from CPP, OAS and RRSPs. For the sake of simplicity, this calculation was performed on a pre-tax basis. In our latest analysis, presented below, we have reflected the impact of income tax and the results are even more startling. The target retirement income for this particular couple reduces from 51% to only 43%.

InvestingForMe has used the Morneau Shepell study as the base for the article - Good news: new numbers for retirement planning


Note: At InvestingForMe, we prefer to base retirement planning upon what you know - your current spending habits - not estimates for future earnings and assumed investment returns.

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