Some of my younger clients are concerned they might be over-saving. I think they might be onto something.
I have the unique perspective of having written hundreds of retirement plans over the last eight years. One common theme is that retirees who had a high savings rate throughout their careers are rarely able to flip the switch from savings mode to spending mode.
Imagine you spent $50,000 per year after-taxes during your working years, while consistently saving 25-30% (or more) of your income. In retirement, it’s clear you can safely spend up to $100,000 per year without ever worrying about running out of money.
Could you do it? Could you double your spending in retirement and enjoy the fruits of your labour? I’d argue most can’t (or won’t).
What if, instead of spending $50,000 per year throughout your working years for the chance of spending up to $100,000 per year in retirement, you spent $75,000 per year throughout your entire lifetime (adjusting annually for inflation)?
Economists call this consumption smoothing. I call it maximizing your life enjoyment.
Think about it. You save and invest for the future, but when it comes time to spend the money you can’t bring yourself to do it. You’ve never exercised your spending muscles.
Instead of living your dream retirement you continue saving, maxing out your TFSA annually and taking your minimum RRIF withdrawals and putting the money into a non-registered account (just in case).
My younger clients are starting to see this happen with their own parents. Heck, my older clients know it happened with their own parents.
How do you know you’re over-saving? A big clue is if you’ve maxed out your registered accounts and start asking, “what’s next?” with your extra cash flow.
Instead of blindly shovelling money into a taxable account with no purpose, consider increasing your spending on one or two categories that are important to you. Start exercising those muscles so that when you get to retirement you’re not sitting there with millions of dollars asking, “what’s next?”.
I’m far from a YOLO practitioner. We need to strike the right balance between spending now and saving for the future. But the future is never promised.
If you have the means to enhance your life enjoyment while still saving a reasonable amount for retirement, I say go for it.
After all, my anecdotal evidence suggests you probably won’t increase your lifestyle spending in retirement anyway (you certainly won’t double it). A modest increase in spending now, sustained throughout your lifetime, can lead to better overall life satisfaction.
This Week’s Recap:
This is the longest I’ve gone without updating the blog, but we’ve been away travelling for the past few weeks. Our third trip to Scotland was absolute magic. We spent four nights in Edinburgh, five nights in Fort Augustus, and another two nights in Glasgow.
We rented a car in Stirling so we could drive through the Scottish Highlands and out to the Isle of Skye. We lucked out with some incredible weather on Skye, and enjoyed our stay at the south edge of Loch Ness.
Before our travels, we shared a monster post on probate, including how to avoid or reduce probate fees and whether you should even try.
Many thanks to Erica Alini for including that post in her Carrick on Money round-up.
Morningstar’s Christine Benz on her failings as an investor – do as I say, not as I do.
PWL Capital’s Ben Felix answers the question, will more money make me happier?
Reddit’s Personal Finance Canada community offered advice on whether it makes sense to pay down a mortgage earlier, especially with high interest rates.
High interest rates mean the new normal in vehicle buying is a monthly payment in the $1,000 range. Gross.
Single and stressed? Squawkfox Kerry Taylor offers financial advice when flying solo.
Why the best days are ahead.
Cullen Roche explains why 2023 is the year that gives everyone a narrative.
Retirement without home ownership is possible. Financial advisers explain how to get started.
Financial planners tend to use inflation or inflation + 1% when projected future wage growth. That’s not quite right. PWL Capital’s Jordan Tarasoff looks at how Canadian incomes change with age.
A look at the return on hassle spectrum when it comes to investing. Count me as a hands-off, no hassle type of investor.
Ben Felix explains structured notes and says when you’re having dinner with lions make sure you’re at the table and not on the menu. Point taken:
My Own Advisor Mark Seed says to watch out for RRSP / RRIF taxation.
Norm Rothery catches up with the retirement class of 2000 (subs).
Michael Batnick on the cruel irony of investing:
Investors: “The market feels risky right now. I’ll just park my money in this high-yield savings account earning 5% and wait for the dust to settle.”
Stock market: LOL
A Wealth of Common Sense blogger Ben Carlson says everyone has their own money trauma.
The Evidence Based Investor asks, do you have enough money already?
Finally, Jaclyn Cecereu does a terrific job breaking down CPP contributions and benefits.
Enjoy the rest of your weekend, everyone!