When To Be Selfish and When To Be Generous In Retirement

Prospective clients come to me when they’re on the cusp of retirement and looking for answers to key questions like when can I retire, how much can I spend, how long will money money last, and, ultimately, am I going to be okay?

I gather information about their current situation (income, account balances, asset allocation, expected income from a pension and/or government benefits, property value, debts, etc.), and ask them to list their financial goals and burning questions.

Then I plug those numbers into my financial planning software to model out my interpretation of their current situation and future goals to see what’s possible. Your numbers are going to tell a story, whether there are obvious opportunities to take advantage of or red flags to consider.

I use conservative assumptions for life expectancy, rates of return on savings and investments, and assume spending will increase annually with inflation.

One common observation I notice is that the early retirement years can often be financially precarious. That’s when new retirees want to spend the most money on travel and hobbies. It’s also a period of time that often overlaps with the desire to help children through post-secondary and into early adulthood.

Throw in a new vehicle and a home renovation into the mix and you can easily see the financial stress signals mounting.

Meanwhile, early retirees haven’t yet taken their government benefits, so they may be drawing significantly from their own savings (RRSPs, TFSAs, non-registered accounts) to make all of this work. 

Not to mention poor stock market outcomes causing sequence of return risk.

I call this the retirement risk zone.

This can be a frustrating time for seemingly well-heeled retirees because they might see their retirement projections look something like this:

Your numbers tell a story, and the story here is a couple retiring with a net worth of $1.8M. Sounds great, except for the bulk of net worth is tied up in their home ($1.3M). And while they have about $600,000 in savings, they also still have a mortgage balance of $100,000 as they enter retirement.

See the dilemma? The couple sees their net worth taking off in their 70s and beyond (once CPP and OAS are fully kicked-in for the couple) and wants to pull some of that forward to spend more now.

But that’s not possible without tapping into home equity (downsize, sell and rent, or borrow on a line of credit). That solution is not appealing for this newly retired couple.

It might be tempting to take up their CPP benefits early (ages 61 and 63, respectively), but they’d be giving up a permanent reduction in their benefits and a lifetime loss of income. Instead, they’ll wait and take their CPP at age 66 along with OAS at age 65.

With the home equity release strategy off the table for now, the couple must spend carefully in these early retirement years to make sure their savings will last.

That means being “selfish” to ensure they can meet their desired spending needs over the next 5-10 years of early retirement (their go-go years).

Selfish because this does not appear to be the time to hand out large financial gifts to their children. Put on your own oxygen mask first before assisting others, as the saying goes. Take your own bucket list trip before emptying your TFSA to fund a child’s down payment.

But, as your CPP and OAS benefits kick-in and boost your guaranteed income floor, and as the go-go years of spending wane, you might find yourself in an annual surplus and even contributing to your TFSAs again.

That, and you might re-consider selling the home as you age – which will top-up your savings buckets.

If your spending needs are being met, you have a surplus of cash flow, and you have an appropriate backstop of home equity and TFSA funds, then it makes perfect sense to explore an early giving approach with your child(ren). Give with a warm hand, before the will is read.

Indeed, rather than continuing to max out your TFSAs while your own spending declines in real terms and you’re still sitting on a pile of home equity, consider your 70s as a time for generosity.

Think about it. Your kids might be in their late 30s, or early-to-mid 40s. A gift of $100k is arguably more valuable and significant at that age than an inheritance of $500,000 when they’re in their 60s and already retired.

It doesn’t have to be $100k – whatever you can reasonably afford in the context of your plan. It could be something as small (yet meaningful) as an agreement to fund your grandkids’ RESPs annually ($2,500/year). What an incredible gift and a relief for young parents trying to balance competing financial priorities in their own lives.

Your generosity could be in the form of buying more time together as a family. One retired couple I’ve worked with pays for the entire family to go to Hawaii for a week each year – covering the airfare and accommodations so that their two children and their families can come together for a relaxing vacation.

The point is, you can scale your generosity to match your financial capacity and values (of course, respecting the needs of your children and their independence).

The key is to talk about it so everyone is on the same page and expectations are properly set.

So, rather than just filling up your TFSAs each year as your own spending declines – I’m making the case for some level of generosity into your 70s and beyond to prevent an overly large final estate and to help give with a warm hand.

You can still leave yourself with a reasonable margin of safety (home equity + TFSA balance) without getting too carried away with growing the pile.

The time to do that is not in your early 60s, when finances are a bit more precarious, but in your 70s and 80s as your personal spending slows down and your net worth starts to climb once again.

Retired readers: Are you providing financial assistance to your adult children in any capacity? How do you balance this in relation to your own retirement plan and resources?