One of the biggest worries for retirees is the fear of outliving their savings. This fear leads many to spend less than they are able to, both during their working years and throughout retirement. It can also lead to “one-more-year” syndrome, where individuals kick the retirement can down the road a little bit longer while continuing to squirrel away money.
Consider this retirement planning scenario where a two-income family earns $170,000 in gross income and spends about $72,000 per year after taxes throughout their working years (adjusting for inflation each year).
They use their extra cash flow to max out their registered accounts, pay off the mortgage early, and open taxable investing accounts to save and invest even more of their disposable income.
At age 65, this couple is able to spend a whopping $128,000 per year after taxes without running out of money by age 95.
This couple’s particular income and spending may not align with your household income and spending. But the scenario itself is more common than you’d think.
Now, what’s the likelihood that a couple who’s used to spending $6,000 per month and saving at such a high rate will be able to turn off the savings ‘taps’ and open up the spending ‘taps’ to the tune of $10,666 per month?
That’s a 77% increase in spending!
Consumption Smoothing
Enter the concept of consumption smoothing. The idea is to avoid that asymmetrical saving and spending pattern and “smooth out” consumption over your entire lifetime.
Think about it. When we’re young we have plenty of time but scarce financial resources. Then when we’re older we have plenty of resources (typically) but much less time.
Why sacrifice too much of our potential consumption (spending) in our early years when we might not be around to enjoy it in our later years?
Note that the concept of consumption smoothing is not the same as a YOLO (you only live once) mindset where you don’t save at all.
It’s more about recognizing that we only have so much time on this planet, and only so much of that time when we’re healthy and energetic enough to tackle everything on our bucket lists.
Consumption smoothing means the family struggling with competing financial priorities can give themselves a break rather than trying to max out all of their savings vehicles. It means that diligent savers can pause their aggressive savings contributions once they reach a certain level and start enjoying some of the fruits of their labour.
Related: My Path To Coast FIRE
Die With Zero
Consumption smoothing is discussed at length in a book I recently finished called Die With Zero.
The author, Bill Perkins, stresses the need to live your richest life now rather than waiting for your retirement years. Perkins wants readers to maximize their so-called life energy and be more present in the moment to minimize future regrets.
He says this doesn’t mean being irresponsible with your money or not saving for the future. For those who plan on leaving an inheritance for their children or to a favourite charity, Perkins adopts the “give while you live” philosophy and encourages readers to include those gifts in their spending plans rather than waiting until the will is read.
Die With Zero is worth a read for those who struggle balancing saving and spending.
Note that Canadian retirement income expert Fred Vettese also agrees with the idea of consumption smoothing, saying that Canadians can probably get away with saving a little bit less during their working years if they take advantage of these five strategies to enhance your retirement.
So what does consumption smoothing look like? Using our previous example of a two-income couple spending $72,000 per year during their working years and then increasing that to $128,000 in retirement, we can adjust that spending to $95,000 per year until age 95.
This approach allows our couple to spend more now (nearly $8,000 per month) and build in some experiences that they may have put off until retirement.
It also addresses a common theme expressed by most of my financial planning clients: the desire to maintain their current standard of living when they retire.
Promo of the Week:
We’re closing in on this year’s Canadian Financial Summit and I’m back once again with another session – this time talking about overcoming investing FOMO. We’ve seen a lot of that in the past 18 months with the rise of meme stocks, innovative technology stocks and ETFs, and cryptocurrencies surging once again.
The Summit will have plenty of other speakers and topics to satisfy your interests. I’m excited for the all-star panel of PWL Capital’s Ben Felix, Passiv’s Brendan Wood, and the Sustainable Economist Tim Nash answering all of your questions and misconceptions about DIY investing.
Claim your free ticket to the Canadian Financial Summit and check it out when the event goes live on September 22nd.
Weekend Reading:
Our friends at Credit Card Genius highlight seven credit cards with extra cash back. Check out their new “GeniusCash” feature.
Here’s the benefit of giving your kids a chunk of their inheritance before you die:
“There’s an emotional reward that comes with giving adult children money to buy a house, start a business or simply support their families, experts say, as well as financial benefits of reducing the value of your future estate.”
A fantastic piece by financial planner Natasha Knox on renting vs. home ownership. Why you can be financially secure without buying.
On theme for today, fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. Here’s how to spend without worry in retirement.
Retirement expert Don Ezra looks at how to help people with decumulation decisions, using a very real issue taking place in Australia.
Here’s the difference between aging in place and getting stuck in place:
“Our homes can also turn into cages if we are not careful. As we spend our money on maintaining them we may have to cut our expenses to pay this which may then further isolate us as our disposable income declines.”
Future housing returns are stark. Here’s why your home is not an investment.
The Humble Dollar’s Jonathan Clements discusses trade-offs: spending today vs. saving for tomorrow; risk vs. return; hiring an advisor vs. DIY.
Millionaire Teacher Andrew Hallam says stocks are going to crash. The problem is, like everyone else, he doesn’t know when.
My Own Advisor blogger Mark Seed asks, why would anyone own bonds now?
Here’s Morgan Housel with a number from today and a story about tomorrow.
Of Dollars and Data blogger Nick Maggiulli with an excellent piece on what really predicts happiness.
Finally, here’s how to pick a job that will actually make you happy.
Have a great weekend, everyone!
