Retirement
A common response from retirees when asked what level of spending they expect in retirement is “same as now” or “status quo.” While this may seem a logical response, it often leads to inefficient planning or even unnecessary financial stress. Knowing how much you can spend in retirement requires an understanding of current spending, including potential contingencies.
In reality, retirement is a fundamentally different phase of life and spending patterns will shift in meaningful ways. Below are some reasons why maintaining the same spending level may not be ideal and why a more nuanced approach can lead to better outcomes.
Work-related expenses disappear
During your career, a portion of your income goes toward commuting, professional attire, meals, and other job-related costs. Retirement eliminates many of these expenses, naturally reducing your spending needs.
Some pre-retirement "costs of living" are actually "costs of working." In its most recent Survey of Household Spending (SHS), Statistics Canada points out that pre-retirement spending may include CPP, EI, insurance premiums, and other "work-related expenses" that can consume a portion of a worker's gross income. Once retired, these mandatory payroll deductions stop immediately.
Retirement savings contributions are no longer required
In your working years, you are actively saving for retirement, often allocating 10 to 15% of your income. Once retired, these savings disappear, meaning your required cash flow can drop significantly.
Taxes may be lower
Retirement income is often more tax-efficient, particularly when structured across different income sources, such as pensions, registered accounts, non-registered accounts or TFSAs. For those retirees that were business owners, they may have the added advantage of receiving dividend income from their company. Lower taxes can mean you need less gross (before tax) income to achieve the same net income level.
Debt is often reduced or eliminated
Many retirees enter retirement completely debt free. Without loan or mortgage payments, a major component of working years’ expenses disappear. While some level of debt may be taken on during retirement, such as home repairs or renovations, the overall impact is usually less than what would have been experienced during the working years.
Asset allocation will change
In our article Why asset allocation is key to investment success we discuss personalized asset allocation and why it is important. How your retirement funds are invested may change leading up to and throughout retirement. These changes will often coincide with the active, passive and late retirement income timeframes. Shifting funds from growth-oriented investments to those with a more conservative focus will impact your income, taxes and account values.
Lifestyle expenses shift over time
Retirement expenses will occur for a period of 20 to 30 years or more. For most retirees, if these annual expenses were tracked each year they would likely see what financial planners refer to as the retirement spending smile. Early retirement years often include more travel and increased leisure activities, but spending typically declines in the middle years of retirement only to increase in the later years as medical expenses increase.
| Phase | Description | Spending profile |
|---|---|---|
| Active years | Early retirement, characterized by travel, new hobbies, and "checking off" the bucket list. | Highest discretionary spending |
| Passive years | A natural slowing down. Travel becomes local, and lifestyle becomes more home-centric. | Lowest overall spending |
| Later years | Discretionary spending drops, but is often replaced by medical or specialized housing costs. | Increased health care spending |
Health care spending
Increasing health care costs are a large unknown when calculating what your retirement expenses will look like in the future. While health care costs may increase later in life, they are often not evenly distributed year-to-year. Planning for targeted health care needs is more effective than maintaining uniformly high spending.
Children are financially independent
Expenses related to raising children, such as education, housing support, and activities are usually no longer present, reducing financial obligations.
Housing needs
Many retirees may choose to right-size or relocate all together. The impact of this may reduce property taxes, maintenance, utility and transportation costs. Housing may become more efficient and less expensive over time.
More time, less costly substitutions
Retirees often substitute time and convenience for money. Many may choose to cook at home instead of dining out or perhaps travel during off-peak times throughout the year. During the quieter years of retirement, they may pursue low-cost hobbies or choose to spend more time with family and friends. This flexibility can meaningfully reduce expenses.
Oversaving and underspending
Planning to maintain pre-retirement spending may lead to excessive conservatism, resulting in:
- Underutilizing savings, which may result in excess tax.
- Missing opportunities for meaningful experiences.
- Leaving behind larger-than-intended estates.
A well-designed plan balances sustainability with enjoyment.
A more effective approach
Rather than assuming flat spending, a better strategy is to model retirement in phases.
This approach aligns financial resources with real-life needs improving both confidence and outcomes.
Retirement is not simply an extension of your working years, it’s a transition into a new lifestyle with different priorities and associated costs, and one of the reasons Why you need a financial plan. Assuming identical spending can distort planning, either by overstating required savings or by misallocating resources over time.
A thoughtful, adaptive spending strategy allows retirees to spend confidently, adapt to changing needs, and maximize both lifestyle and legacy.
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