Can I afford that? Your spending years in retirement
We spend all our lives growing our nest eggs. Why does it feel so scary to start spending them? Welcome to your decumulation years.
RETIREMENT
WRITTEN BY Dave Yasvinski
May 24, 2024
Nicole Ewing has an anecdote that exactly captures the paralysis some retirees feel when it comes to spending money.
“There was this one couple who had $10 million in investments but were driving an old car,” she says. “They had a very low cost of living, a simple lifestyle, yet they were terrified to spend anything. Anytime they wanted to take a trip or a vacation, they would wonder whether they should spend the money.”
Adopt a treat-yourself outlook
Decumulation, much like retirement itself, can look different for everyone. The process requires a flexible, forward-thinking financial plan that not only anticipates future costs but also considers a wide range of scenarios should your circumstances change. Reviewing the plan regularly in order to challenge the assumptions you've made can be helpful: You may be convinced you'll never, ever, start your own business … but what happens if a fantastic opportunity presents itself tomorrow?
It may also be difficult for people to understand that they can spend, Ewing says, and to estimate how much they actually have in the kitty to indulge themselves. Advisors often use a computer simulation that forecasts financial variables so people can visualize how much money they have and how long it will likely last. “The conversation isn’t necessarily, ‘Will you have enough?’” Ewing says, “It can be about showing people how much they would have to spend every year to run out of money.”
She notes that financial literacy can play a big role in understanding how much you can spend without upending your retirement plan. For instance, if you're uncertain about the wisdom behind risking your retirement funds on the stock market, a financial planner can explain the benefits and disadvantages.
“Decumulation decisions really are an individual conversation,” she says. “It depends on what retirement looks like to you and what you’re trying to achieve for yourself, your family and the next generation.”
A plan will also look at income splitting with your spouse and timing your Canada Pension Plan and Old Age Security withdrawals carefully. As well, judging how long your retirement will last, based on your retirement age and how long you might live, may help focus the timing of your withdrawals and spending.
Next steps would be to continue your conversation with your advisor. They can discuss your future objectives, match future spending with your lifestyle goals and tackle knotty issues like tax obligations and the role your home plays in your decumulation plan.
Getting to this treat-yourself attitude may only happen when you have a financial program that gives you both confidence and motivation to spend.
IMAGE: Veronica Park
For nervous savers, decumulation involves having a fundamentally different outlook about spending on yourself: If you can't change your attitude, being anxious about every penny won't help you enjoy your lifestyle.
Decumulation can be complicated, Ewing says, but this phase of life should be a time of carefully managed indulgence. That means deliberately spending on the things that will bring you joy.
The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.TD Wealth represents the products and services offered by TD Waterhouse Canada Inc., TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).TD Wealth Private Wealth Management represents the products and services available through TD Wealth Private Investment Advice (a division of TD Waterhouse Canada Inc.), TD Wealth Private Investment Counsel (offered by TD Waterhouse Private Investment Counsel Inc.), TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company).®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
As Director of Tax and Estate Planning at TD Wealth, Ewing has seen time and time again that one of the hardest parts of retirement is what's called decumulation: withdrawing assets from your savings accounts to enjoy the fruits of your labour. Unfortunately, without a financial strategy, many people worry about meeting future costs during retirement. This can cause them to oversave and even deny themselves the enjoyable lifestyle they are entitled to and were saving for in the first place.
The key, Ewing says, is to develop a decumulation plan with a financial advisor or planner that helps prepare your finances for future costs — no matter what tomorrow holds — but also enables you to have the retirement lifestyle you want.
“Decumulation is really about knowing your options and how you can meet your goals in the most fun way possible,” says Ewing. “It’s a bit of a buzzword but people need to think about this stage of their investment journey.”
Ewing has some suggestions about how to get started.
Come up with a plan
Prepare for the tax bite
Without careful planning, tax time can come as a shock for retirees who may find they owe money for the first time in their lives. But Ewing emphasizes that the order in which you draw down your assets or pull from different income sources (registered and non-registered funds, corporate pensions and government pensions, as examples) can determine the sorts of tax consequences that you might be subjected to. Getting it right can mitigate tax and also “allow your funds to continue to compound and grow larger.”
If you access too much of your money too quickly, you won’t just pay more in taxes, it may result in a substantial clawback of OAS. Again, much of this comes down to financial literacy, Ewing says, as some people aren’t aware they’re required to withdraw funds from their Registered Retirement Income Fund (RRIF) — and pay tax on it — every year. “This is the other side of that savings coin,” she says. “You got the deduction and the deferral, now the income needs to come into your hands.” But planning ahead of time and working with a planner could help minimize the tax impact.
Make a strategy for future accommodations
Selling your family home or downsizing is a big decision, one that has emotional and lifestyle considerations. Many people think that the proceeds from the eventual sale of their home should be part of a decumulation plan. But Ewing cautions that it's not always a good idea to rely on real estate as a source of retirement funds because you may need the money to pay for unexpected expenses or healthcare costs. It’s the last big asset you might have, she says, so you’ll want to use it wisely. On the other hand, you may wish to move locales, to be closer to family or because you can't keep up with the maintenance of a large home. Health problems can also force your hand.
“Either way, you’re going to need to pay for a place to live,” says Ewing. An advisor can help demonstrate how keeping or selling your home could help your decumulation plans and how it might suit your family needs.
Watching your assets decline during your retirement may make people nervous. But Ewing says there can be little need to worry if you are prepared for future costs and you are enjoying spending your wealth on the things you've always wanted to — that is, if you're decumulating like a pro. Intentional spending, with a proper plan and with the assistance of a financial advisor, can move you toward your goals of enjoying retirement and managing bills whatever the future holds.
$3,000 - $20,000
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How much could popular retirement indulgences cost?*
*Costs are annual and per person where applicable. Prices, for illustrative purposes, were gathered from online sources in April 2024 and are subject to change. 1
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GOLF MEMBERSHIPS
$2,500 - $8,000
NHL SEASON TICKETS
$2,000 - $8,000
International business class flight
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$100 - $200 per sq. ft.
COTTAGE REMODEL
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Up to $50k - and higher
CLASSIC CAR
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Disclaimer
Nicole Ewing
Director of Tax and Estate Planning, TD Wealth
1 SOURCES
Business class flightsAir Canada flight search, Air Canada, accessed May 13, 2024, www.aircanada.com/en-ca/
Cottage renovations
How to prepare for your cottage renovation, Alair Homes, accessed May 13, 2024 www.alairhomes.ca/barrie/blog/how-to-prep-cottage-reno/
NHL tickets
Full season tickets, accessed, St. Louis Blues, May 13, 2024, https://www.nhl.com/blues/tickets/full-season-tickets
Membership benefits, Vancouver Canucks, accessed, May 13, 2024, portal.canucks.com/benefits
Golf memberships
Club finance update, Vancouver golf club, accessed May 13, 2024, www.vancouvergolfclub.com/SiteData/Blog/December_2021/Club_Finance_Update
The Privileges of Full Membership, Seymour Golf and Country Club, accessed May 13, 2024, seymourgolf.com/seymour-private-golf-course-memberships-vancouver/full-membership/
2024 Canadian golf club memberships, Canadian Golf Club, accessed May 13, 2024, canadiangolfclub.com/collections/2024-membership
Classic carsSearch markets, Collector car markets, accessed May 13, 2024, www.classic.com/marketsSearch markets, Classic cars for sale, Ontario, Hemmings, accessed May 13, 2024, www.hemmings.com/classic-cars-for-sale-ontario,Search markets, Classic cars.com, accessed May 13, 2024, www.classiccars.com
“I would encourage people to think of their spending in context of their whole retirement and recognize that if you spend extra in one year, you can pull back in another,” she says. “If you’re taking a trip, instead of sitting back in economy, you may want to think about what buying a first-class ticket looks like holistically — not just over one year. It may initially look like you’ve overspent, but you’re talking about a one-time cost that you may never incur again,” she says.
She says getting to this treat-yourself attitude may only happen when you have a financial program that gives you both confidence and motivation to spend.
“I would encourage people to think of their spending in context of their whole retirement and recognize that if you spend extra in one year, you can pull back in another,” she says. “If you’re taking a trip, instead of sitting back in economy, you may want to think about what buying a first-class ticket looks like holistically — not just over one year. It may initially look like you’ve overspent, but you’re talking about a one-time cost that you may never incur again,” she says.
She says getting to this treat-yourself attitude may only happen when you have a financial program that gives you both confidence and motivation to spend.