Retirees usually have bucket lists and dream vacations they want to go on while they’re still healthy and fit.
But after trips and maybe a few too many dinners out over the past four years, it sounds like you’re suffering buyer’s remorse. The good news is you realized you’re jeopardizing your ability to fund the rest of your retirement, and you can take steps to protect your financial well-being before it’s too late.
Many retirees are spending more than they planned
About a third of retirees (32%) say their monthly expenses in retirement are higher than they expected, according to the 2024 Profiles of Retirement conducted by the Ontario Securities Commission (OCS), with sustained high inflation topping Canadians’ list of concerns.
Despite this, 70% of retirees are say their standard of living is similar to or better than what it was pre-retirement.
Does this mean that most retirees are planning to indulge in more leisure activities now that they have the freedom? Well, it’s actually the opposite.
When comparing the spending objectives of retirees and pre-retirees, only 35% of Canadians in retirement are prioritizing recreational travel during their golden years. In comparison, 55% of their non-retired counterparts intend to become frequent flyers.
This isn’t necessarily a bad thing. Because our health will inevitably decline as we age, we may have more energy, mobility and strength to pursue leisure activities and travel in our early years of retirement.
Doing so, however, will require careful planning to ensure you remain comfortable throughout retirement and are able to fund a potential increase in medical expenses in later years.
Getting back on track
To ensure you have income throughout your retirement, determine a sustainable rate at which you can withdraw from your retirement savings.
A common rule of thumb is the 4% rule. It says if you withdraw 4% of your investment portfolio in the first year and then this same amount plus an adjustment for inflation in each subsequent year you have a low probability of running out of money for 30 years.
In the case of spending too much in the early years of retirement, you could determine today how much of your savings remain and begin employing the 4% rule from this point forward. This will likely mean you have to cut back on spending, but it could help ensure you remain comfortable going forward.
This rule can be a useful starting point, but that doesn’t mean it’s a one-size-fits-all solution since each person’s situation is different. Instead, you may find that a different withdrawal strategy works better for you.
For instance, you might want to use the percentage of portfolio strategy, where you withdraw a fixed percentage of your portfolio’s value each year. This means your income will fluctuate each year with the market value of your portfolio.
If you follow a fixed-dollar withdrawal strategy, you’d withdraw a fixed dollar amount every year for a set time and then re-evaluate.
Optimizing your financial strategy
You want to make sure your portfolio asset allocation reflects your investing horizon and risk tolerance. You may want to consider speaking with a financial advisor about your situation. Many advisors today have modeling tools at their disposal that allow them to run personalized economic and life scenarios to help determine the best withdrawal strategy.
An advisor can also help with other retirement income withdrawal considerations, such as the amount of income you’ll be receiving from the Canada Pension Plan, your required minimum distributions from your RRSP and/or TFSA and how and when to take from each type of account and asset class to be as tax-efficient as possible.
As you get serious about spending responsibly, you may want to reevaluate your lifestyle and earn some additional income. Creating a budget and tracking expenses can be valuable tools in determining where expenses could be cut back.
To earn additional income, you could take on a side hustle or part-time job. If major changes are needed, you may want to consider renting out a room, sharing a place with a friend or even moving to a less expensive area. Other options you might consider are accessing your home equity and borrowing against the cash value of a life insurance policy or even selling it.
There’s nothing wrong with taking advantage of your good health early in retirement to live a little. But if you get off track financially, acknowledging the issue and tackling it right away can help to ensure a comfortable retirement in your later years, too.
Sources
1. Ontario Securities Commission: Profiles of Retirement (Jan 10, 2024)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
