A recent article in the Financial Post concludes that spending by those who are retired declines with age and correspondingly wealth increases for those over 70 years of age. Our experience is quite the opposite among the higher net worth clients we have helped through retirement. In fact, I continually caution my clients to count on higher expenses in the future for the following reasons:
- Health care costs will increase as more boomers rely on Canada’s publicly funded system. Opting for private care will become the norm particularly for those who can afford it.
- Inflation is coming. We just don’t know when. My concern is that once it starts it may become more significant than most anticipate. Costs across the board will rise and retirees will see their wealth erode.
- We are living longer and healthier lives today. Many retirees want to travel extensively while they’re healthy which is often well into their 70s and 80s.
- Maturity of registered assets (RRSPs, etc.) results in higher taxes. Generally, we advise clients to consume non-registered assets first allowing RRSPs/RRIFs to compound on a tax deferred basis. Eventually, income from registered assets becomes taxable and as a higher percentage of registered assets are brought into income, more tax is paid at generally higher marginal rates and OAS clawback may kick in. This can lead to a spiralling effect on the consumption of capital as taxes take a larger bite out of net worth.
- Income splitting tax savings end on the death of a spouse – Many high net worth couples split pension and investment income to reduce taxes. This income becomes fully taxable in the survivor’s hands at higher marginal rates.
- Adult children are becoming more dependent on their parents in this weak global economy which unfortunately may be with us for some time. Similarly, many parents want to help their children with housing as affordability is otherwise out of reach.
So if you have significant net worth, don’t bet on your expenses declining or your net worth increasing after retirement; and plan accordingly. Save all you can, pay off your debts, maximize RRSP contributions and get some advice on whether your retirement objectives are realistic.