Spending your life savings

After finally reaching retirement, a critical question: what do you do with your money once you get there?

Spending your life savings

Rebecca Drobis/Blend Images/Corbis

With its postcard-perfect main street and abundant antique shops, Port Hope, Ont., is a popular destination for new retirees trying to escape big-city life in nearby Toronto. But while the living appears easy in this idyllic town, it turns out that many of its new residents are having a difficult time enjoying the fruits of their working years. “People have sold their $2.3-million homes in Toronto and moved into a $230,000 bungalow and are more than comfortable financially,” says Christopher Jobb, a local financial planner with Edward Jones. And yet, Jobb says that, thanks to treacherous economic times and a baby boomer mindset geared toward wealth creation, many of his clients have opted to live more like paupers than princes, forgoing long-talked-about overseas vacations and pricey golf memberships. “In this town there’s a lot of wealth, but they’re not using it because they think they’re running out.”

It’s not just a Port Hope phenomenon. A poll conducted by Ipsos Reid last year for RBC found that 74 per cent of Canadian pre-retirees (age 50 and over) planned to spend their golden years jet-setting around the globe, while only 58 per cent of actual retirees said they were doing any travelling. The same poll also found that 23 per cent of retirees were spending their retirement years “improving my knowledge about finances,” while only 12 per cent of those heading toward retirement envisioned themselves having to do the same.

Jobb blames all this on the increasingly tricky calculations people need to perform once they stop working. Where once Canadians worked until 60 or 65, collected their gold watch and then started drawing on the company pension plan, these days many retirees are expected to manage their own money. “There’s all sorts of questions you have to grapple with,” says Mark Neill, head of PH&N Investment Services in Vancouver. “When you’ve got the million bucks, you’ve got to do more planning. The math becomes much more important.” Add that to the fact that Canadians are living longer and the lingering fears over the possibility of another 2008-style financial crash, which caused millions of carefully managed retirement portfolios to go up in smoke (at least on paper), and it’s easy to see why some retirees are, in Jobb’s words, “freaked out.”

While there’s no question that more Canadians have become retirement savings experts over the past few years, startlingly few have bothered to consider an equally important question: how are you going to spend that money once you get there?

Consider the following scenario: you’ve just retired without a company pension and roughly $700,000 in your RRSPs. The first thing you have to decide is what kind of lifestyle you plan to lead, and how much money you will need to draw out of your nest egg each year to fund it, while still holding enough in reserve to pay for unforeseen expenses like health issues or other emergencies. Planners recommend that most Canadians withdraw four per cent of their savings annually, which, in this case, would translate into about $28,000 a year for at least 25 years, while still leaving $445,000 for emergencies and estate planning (assuming three per cent interest). However, a recent poll by Edward Jones found that nearly half of Canadians envisioned themselves withdrawing between six per cent and 20 per cent, which could deplete your savings in as little as six years.

To make matters more complicated, the income needs of a typical retired couple change as they get older. Most people tend to travel immediately following retirement because they’re still relatively young and in good health—which is a good argument for withdrawing more than four per cent of your nest egg early on. The risk, of course, is that doing so means you will have a smaller sum to keep invested, raising the spectre of financial problems down the road. On the other hand, most people’s cost of living goes down dramatically as they age and spend more time at home. Good planning is key.

Wayne Angman, 66, is a former marketer in the pharmaceutical industry. When he was pushed into an early retirement nearly a decade ago, most of his money was in self-directed pension accounts and RRSPs, which he converted to a Registered Retirement Income Fund, or RRIF, which is essentially the opposite of an RRSP (you withdraw money in regular instalments instead of making contributions). “You have to realize that it’s a finite pot,” he says. “You have to change your investment strategy.”

The first thing Angman did was sell his house in Langley, B.C., and downsize to a smaller home near a golf course in Kelowna, a picturesque lakeside city in the Okanagan Valley. But he cautions that such a strategy doesn’t necessarily amount to a financial panacea once the costs of moving and lawyers’ fees are thrown into the mix.

The stock market crash in 2008 was also a wake-up call. Since he retired early, Angman decided to stay invested in the market so that his savings would continue to grow at a healthy clip, which they did—but only for a few years. “When you’re on the contributing side you don’t mind when the market drops low because those are good times to buy,” says Angman. “But when you’re on the other side, it’s not a good feeling. You do begin to wonder whether the good times are really over.”

Volatility is one reason that Rein Selles, the president of St. Albert, Alta.-based Retirement/Life Challenge Ltd., tells people who are approaching retirement to focus on income, not further wealth creation. “The only way your retirement is going to work is if you can fund the life you want to lead with the money you have after tax,” he says, noting that a big market plunge can cause RRIF holders with significant equity positions to trigger further losses since they are still required to make minimum monthly withdrawals. In general, he recommends that retirees ensure they have enough fixed income assets to cover their basic costs—housing, food, health care—no matter what happens in the markets. “Over 90 per cent of my clients are shocked that they’re doing better than they expected. Their expenses come down and their income comes in at a much lower tax rate.”

For those who need more fixed income, Selles says annuities, which are purchased upfront from life insurance companies and guarantee monthly payouts for the rest of the holder’s life, can be “a great tool.” Reverse mortgages can also help improve cash flow, as long as people don’t abuse them. “Reverse mortgages are for people who have a house, but need income,” says Selles, who co-authored the book 10 Things I Wish Someone Had Told Me About Retirement. “Unfortunately, they are advertised as: you have a house, but you need a sailboat.”

Though Angman says he and his wife enjoy a “fairly decent” lifestyle, he’s the first to admit that retirement isn’t necessarily carefree even if you’ve planned for it carefully. Unlike their neighbours, the two have forgone treating themselves to a big trip every year and track every dollar of their spending. Angman says new retirees also need to be prepared for unexpected headaches. He discovered that drawing on pension money that had been deposited by a previous employer into a locked-in RRSP was tricky to access. And he made a couple of costly tax-related mistakes. “Don’t assume that the financial people are always right,” he cautions. “Also, when it comes to the government programs: learn the rules. You have to do your own homework.” But don’t forget to enjoy yourself either. “There’s a poverty in life that can occur with big savers,” Selles says. “Because they never really learn how to live.”


Spending your life savings

  1. Those minimum withdrawal rates imposed on those of us who have RRIFs are killers. The market has been volatile and negative for some years now and, as in the case of folks who have hit their 74th year, you have to withdraw 7.59% of your RRIF in that year. Your investments go up 2% if you are lucky, so, it is all downhill from here. At this rate an application for social assistance could be in the offing. Damn, if only I had been an MP and receiving a gold plated, unfunded, cost-of-living indexed pension! Something is awfully wrong. Our politicians are living in the stratosphere. They have no idea what the average guy endures. Sadly, many of them came from among us but they soon become addicted to the perks which include high salaries, hefty benefits and “to dream of ” pensions.

    • I don’t have a problem with the minimum withdrawal rates, hell, if you’re 74, take the money and run with it.
      You are on the mark regarding politician’s pension perks. 

      • Run after paying the ultimate withdrawal tax i.e., over 40%.

    • Yup, the minimum withdrawal rate from an RRIF is a big ugly.  It’s there so our government ensures that it extracts their tax bite before you (or your surviving spouse) are dead, and as a mechanism to pay out as little OAS/GIS as possible.

  2.  Why on earth did you use a photo of Waterton Lakes National Park? What does it have to do with retirement?

    •  Why not?  Got a better picture?

  3. Both my wife & I have defined benefit pensions we can live off, plus we have no mortgage & are in a plus 55 single storey townhouse complex where we plan to stay until death, if possible. We manage to spend 5 months a year in our RV in Mexico without touching savings. In fact we end up spending less than if we stayed home. We have 200k in RRSP’s we do not really need. It took an uncomfortable feeling to draw 15K out of it this year to finance a summer trip to Europe. Went against all our instincts. For some reason using savings feels awkward.

  4. You’d think, from this article, that the accompanying photo is of Port Hope, Ont. I recognize it clearly, however, as Waterton Lakes National Park in south western Alberta, looking towards Goat Haunt, Montana.  

  5. Your RRSP/RIF should NOT be confused with a product to leave an inheritance BTW !
    ‘The first thing retirees have to decide’?? Most decisions about your retirement should have been made before you ‘walked out the door on your final work day’ IMHO !
    You enjoyed the tax free status of the RRSP, NOW accept the RIF provisions as part of the agreement. Put it in savings, reinvest or help your inheritors early !
    Kick back and enjoy your remaining years as I am enjoying month #68 of my so called ‘Freedom 55 pipedream’ !

  6. I am wondering why you would not use a picture of Picture Perfect Port Hope, ON?

  7. D. Hart, you are correct that you have to withdraw more than your portfolio is earning as you get older.  Wait until you hit 90 and have to take 20% out!  But just because you are forced to withdraw from the RIF doesn’t mean you have to spend it.  You can put it in a TFSA, or if that’s maxed out, a regular investing account.  Invest those funds in preferreds or dividend common stocks to avoid 100% tax on interest from bonds.

  8. I am wondering why you did not use a photo of “postcard-perfect” Port Hope, ON?

  9. Can you share your experience on what you referred to as challenges on drawing on pension money that had been deposited by a previous employer into a locked-in RRSP.

  10. A good financial adviser is essential for most people.

  11. The pension won’t be needed for long. The legacy radioactive waste in Port Hope courtesy of Cameco will put a lot of seniors in the hands of the medical system.

    • On what do you base that assertion? Statistics? There are none that back up your claim. The hysteria of Helen Caldicott? Sorry, not into True Believers. Families Against Radiation Exposure -the widely discredited tin foil hat crowd that has now all but disappeared in disgrace. Do you live in Port Hope and find yourself living well into your eighth decade like Tom and Pat Lawson et all, professional fear mongers? What? What do you base your assertion on exactly.

      • Living longer but in the hands of the medical system is my point – Tom and Pat Lawson are not well – their daughter has brain cancer. Radiation is a slow kill.

  12. The minimum RIF withdrawal rates seem bad only to those who pay taxes, ie to those in middle  income brackets and even worse to upper income earners who fear OAS clawback.

    (Also worse as you folks pointed out to those who invested in low earning bonds instead of a mix of investments. )

    But those who are whining over their poor after tax returns now,  benefited
    from tax relief on the RRSPs  all those years income accumulated within
    the RRSPs and RIFs as well as each year in which they made

    And has everyone forgotten:that RIF still has a tax shelter feature for the earnings that can be made on the amounts remaining still inside the RIF? And a portion of the income is tax deductible?

    Admittedly, that has less of an offsetting balance as the recipient ages and balances decrease and withdrawals increase. On the other hand, income outside of the RIF usually decreases as people age as well, and consequently so does the tax bracket. And then we die!

    My Mum who is 98 this year as a result of sheltering money in an RRSP, and taking minimum withdrawals from age 65 from the subsequent RIF, still receives an income from that RIF after 34 years of collecting from it. That’s really remarkable, and it is still enough of an income to make a difference.

     During her old age, rates were all over the place, and she invested primarily in GICs. When there were high rates, inflation was equally high, but at least the RRSP and RIF sheltered her gains from the taxman. Increases in the OAS and RRSP has offset inflation. Now that rates are low, she still has enough income to live off, enjoyed a good life, and could, if she had to, support herself from these sources alone.

    Its hard to predict where the rates will go, probably flat over the short term, then up as countries try to inflate away their debt. I think most of those complaining now will in the future be really glad, if they are still alive,  to have money sheltered in RIFS and RRSPs.

    Personally, my hubby and I have a bit more than we think we need, and deliberating about when is most tax effect timing to turn our RRSPs into RIFs.

    Our latest thought is as we age to gradually hand any tax troubling excess we might 
    have over to our kids in stages, using a five year review plan of their
    needs and ours, and leaving a big cushion for the unexpected, including 
    continually maxing out that new TFSA, a tax shelter with untaxed

  13. I can’t believe this article actually recommends annuities. Give all your money up, just to have it returned back to you in small amounts with interest less than inflation! “But it’s guaranteed!” So is your savings account, but at least you have access to your money. 

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