Financial Facelift

Brenda Bouw

Special to The Globe and Mail April 9, 2021

Investors are told throughout the course of their lives to spend less and save more if they want a comfortable retirement. For some, those frugal habits can be hard to break once they stop working – even if they’ve saved more than they could hope to spend for the rest of their lives.

Case in point: Recent research from U.S. asset-management giant T. Rowe Price shows many retirees are focused on asset preservation.

“Conventional retirement income planning assumes that retirees want to maintain a certain standard of living or a certain level of spending and attempt to generate enough income to support that spending level,” the report says. “But the data suggest that the opposite might be true. People are flexible about their spending and adjust it to match their income so that they can avoid drawing down their assets.”

Underspending in retirement may not sound like a problem unless it means depriving your happiness or compromising your health, according to some financial advisors.

“Some people make many sacrifices preparing for retirement. What I see happen is they can get stuck in a mindset of not wanting to touch their nest egg and spend it, which compromises the quality of life and what they thought their retirement would look like,” says Kathryn Del Greco, vice-president and investment advisor with Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto.

A common regret she sees is people putting off travel and then, suddenly, they can’t take a trip, either due to health issues or, more recently, because of COVID-19 pandemic-related restrictions.

“Some people keep putting off enjoying the experiences and pleasures that life has to offer because they’re so busy saving for retirement,” she says. “Retirement doesn’t guarantee that you’re going to have the health to enjoy it. There should be a balance.”

Rona Birenbaum, founder and certified financial planner at Caring for Clients, a fee-for-service financial planning firm in Toronto, says underspending in retirement can be a problem if it’s affecting a person’s health.

An example is if they don’t want to spend money on much-needed treatments that can improve their mobility, such as physiotherapy. Another example is if they refuse to spend money they can afford on entertainment or other social activities when isolation is an issue.

“Frugality is a problem if their decisions are undermining their physical or mental well-being,” Ms. Birenbaum says.

Some retirees are concerned about living life to the fullest in retirement because they want to leave more money for their kids, says Warren MacKenzie, head of financial planning at Optimize Wealth Management in Toronto.

“Many retired people think, ‘Oh, well, if I don’t spend it there will be more for the kids,’ and they see that as a good thing. But it is not always a good thing,” he says.

Unless the adult children can’t save for their own retirement because of an illness or disability, he says parents shouldn’t be sacrificing their retirement lifestyle to leave more money for their kids. Leaving children more money could also discourage them from working harder to build their own retirement portfolio, getting a sense of accomplishment from being successful, and having enough assets to pass on to their own kids some day.

In addition, Mr. MacKenzie says retirees earned the money, so they should feel empowered to spend how much they want on themselves.

“I’m always preaching this message that, ‘You work hard for your capital and if you don’t get to use it, it’s a waste,’” he says.

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recommended for people to worry less about money in retirement, and maybe spend more.

Mr. MacKenzie recommends people begin by figuring out how much they want to leave in their estate and work backward to estimate what they can spend in retirement.

“What I like to do when working with clients is say, ‘Tell me your end goal.’”

He often breaks it down into two types of capital: essential and surplus.

“Essential capital is what you need to achieve your goals, including the amount you want to leave behind. If you have more than that, then that’s surplus capital … you can do something with,” Mr. MacKenzie says. “You could live a better lifestyle, drink better wine and travel. You could give it to your heirs in advance, a little bit at a time when they most need it, or get involved with a charity.”

Still, advisors need to be careful when suggesting to clients that they can open the purse strings wider, Ms. Birenbaum says, as it may be out of character for those particular people.

“The first thing to do is to recognize that the decisions seniors are making to be frugal, even if they don’t need to be, are generally borne out of their character, their values, their life experience,” she says. “For some, not spending on certain things creates a feeling of stability, security, consistency.”

Using a financial plan, Ms. Del Greco says her approach is to talk to clients about how their savings can enrich their lives. An example could be buying a recreational property for the family to enjoy, or putting an expansion on their house to make more room for visiting children and grandchildren.

“We like to look at, ‘What does the money need to do for you?’” she says, “and let us help you achieve that. Our job is to help the money grow, to deliver you the quality of life that matters to you most. It’s not just about dollars and cents; the dollars and cents need to do something for you. So, being focused singularly on just savings, you’re missing all the joys of life you should be participating in. … The last thing you want to do is shortchange yourself.”

Warren MacKenzie is Head of Financial Planning at Optimize Wealth Management

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