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Why You’ll Never Actually Spend Your Retirement Savings (as a Canadian) — Transcript

by Pathway Wealth - Chad Wiebe CFP · 3,812 words · 570 segments · language en · Watch on YouTube

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0:00After 13 years of helping Canadians
0:02retire, I can tell you something that's
0:04going to sound completely backwards. The
0:07most financially prepared retirees, the
0:11ones who saved diligently their whole
0:13lives and did everything right, are
0:16almost always the ones who end up dying
0:18with more money than they had the day
0:22they retired. And I'm usually not
0:24talking about a little bit more. I've
0:26sat across from clients in their 80s who
0:29have significantly more wealth than when
0:31they stopped working despite spending
0:34from their portfolio for 20 plus years.
0:37And they're not the exception. They're
0:39actually much closer to the norm than
0:41you would realize. Now, most people hear
0:44this and think, well, that must be
0:46because the markets did really well or
0:48they just got lucky about their timing.
0:50But that's not actually what's
0:52happening. What's actually happening is
0:54that there are three forces built into
0:56the Canadian retirement system that are
0:58making it almost impossible for
1:01well-prepared Canadians to actually
1:04spend down their savings. And most
1:07people have never had anyone walk them
1:08through these three forces. So today I
1:12want to show you exactly why this
1:14happens. What the research from five
1:16different countries actually says about
1:18it and most importantly at the end what
1:21this should change about how you plan
1:23for your own retirement. Because if you
1:25understand these three forces, you'll
1:28stop losing sleep over whether you have
1:30enough and start asking a much better
1:32question, which is whether you're
1:34actually using up what you've built. I'm
1:38Chad. I'm a certified financial planner
1:40here in Canada and I've spent the last
1:4213 years helping Canadians figure this
1:45stuff out. Let's get into it.
1:49And quickly, if you're watching this and
1:51wondering whether your plan is set up to
1:53actually use your money instead of just
1:56protect it forever, there's a link in
1:58the description to book a call. Now, let
2:00me show you the very first force. Force
2:03number one, your government benefits
2:05cover way more than you think they will.
2:08The first force is one that I think
2:10catches a lot of people offguard more
2:12than anything else. And it has to do
2:14with how much of your retirement
2:16spending is already covered before your
2:18portfolio contributes a single dollar.
2:21Most Canadians I sit down with have a
2:23rough idea of what CPP and OAS will pay
2:26them. They know it's something, but
2:28they're never actually really sure of
2:30what the calculations will work out to
2:32and what the real spending of these
2:34benefits will actually cover. And when
2:36we run the math for the first time
2:38together, the reaction is almost always
2:40surprised to see exactly how much is
2:42actually covered. So let's take a look
2:45at a couple. Let's say they're both 65.
2:48Let's say they each qualify for a strong
2:50CPP, 90% of the maximum. Now, I want to
2:54be upfront. This is higher than the
2:56national average. The average Canadian
2:58gets closer to about 60% of the maximum.
3:01But for someone who has worked a steady
3:03career at a decent income for 30 to 35
3:06years, 90% is absolutely achievable. And
3:10it's the kind of person I tend to see in
3:12my practice. So let's use it to make
3:15this point. In 2026, the maximum CPP for
3:19someone age 65 is $1,58.
3:23So 90% of that is $1357.
3:27If this is a couple, now we're looking
3:28at $2,714
3:31just in CPP. Add in two full OAS's of
3:36$728
3:38each. And now between CPP and OAS, this
3:41couple was bringing in roughly $4,170
3:45per month or about $50,000 per year
3:49before we've touched a single dollar of
3:52their savings. And that's if they take
3:54everything at 65. But if this couple
3:57delays their CPP to 70, something I
4:00recommend in the vast majority of my
4:02cases, that CPP income jumps by 42%.
4:07Their combined CPP goes from what was
4:102,714
4:12to now 3,854
4:15per month. If we're adding OAS back in,
4:19starting at 65, this is now $5,310
4:23per month of governmentbacked income,
4:25that's over $63,000
4:27a year in guaranteed, inflationprotected
4:31governmentbacked income. Now, let me ask
4:34you this. What does the average Canadian
4:37couple actually spend in retirement?
4:40When I sit down with clients and go
4:41through their real spending, not what
4:43they think they spend, but what they
4:45actually spend, most couples land
4:48somewhere between about 4500 and 6,000
4:51per month. Some are obviously higher,
4:53some are obviously lower, but that range
4:55covers a huge portion of the Canadians
4:58that I work with. So, if this couple was
5:00bringing in $5,300 per month from the
5:03government and the real spending is,
5:05let's say, $5,500 per month, the gap
5:09their portfolio needs to fill is only
5:11about $190 to 200 per month or $2,300
5:16per year. Using what I call Chad's
5:18ratio, which states that for every
5:20$1,000 per month you need in retirement
5:23from your portfolio, you need about $200
5:26to $250,000
5:28invested. This small $190 monthly gap
5:32requires somewhere between $40 to
5:34$50,000 in savings to sustain. And yet,
5:38this couple probably has around
5:40$500,000, maybe even a million sitting
5:43in their accounts. They are funded for a
5:47gap that is a tiny fraction of what
5:49they've saved for. And this is force
5:51number one, the Canadian government
5:53benefit system, especially when you time
5:56CPP and OAS properly. covers way more of
6:00your retirement spending than most
6:01people ever realize. And because people
6:04don't run this math, they keep saving
6:07and they keep protecting as if their
6:09portfolio needs to do all of the heavy
6:11lifting when in reality, in some cases,
6:14it barely even needs to show up. Force
6:17number two, your savings target is
6:19probably way too high. The second force
6:22is closely related to the first one, and
6:24it has to do with how people set their
6:27retirement savings target in the first
6:29place. If you've ever Googled, how much
6:32do I need to retire in Canada, you've
6:34probably seen numbers like 1 million,
6:361.5 million, or even 2 million thrown
6:39around. And those numbers feel
6:41authoritative, right? They show up in
6:43articles and bank advertisements and
6:45online calculators. So, you start to
6:48anchor to those numbers. But the problem
6:51is that those numbers are almost always
6:53based on a replacement ratio, meaning
6:56that they take your pre-retirement
6:58income and assume that you'll need 70 to
7:0080% of that in retirement. And that
7:03assumption is where everything starts to
7:05go sideways. Your pre-retirement income
7:08includes a bunch of costs that disappear
7:10the day you stop working. You are no
7:12longer contributing to CBP. You're no
7:15longer contributing to EI. You're no
7:17longer making RRSP contributions. You're
7:20no longer commuting. You're probably not
7:23buying workc clothes or eating lunch out
7:26four or five times a week. And for a lot
7:28of people, the mortgage is paid off or
7:30at least close to it by the time they
7:32retire. So when we strip away all of
7:34these other things and see what people
7:36actually need to live their life in
7:39retirement, the number is almost always
7:41lower than what they think from a
7:43generic calculator. And I usually don't
7:46mean by just a little bit. It's usually
7:48a pretty big gap. I have had people come
7:50to me convinced that they needed 1.2
7:53million to retire because they read it
7:56in an article somewhere. But when we sat
7:58down and went through all their real
8:00spending, we found they only needed
8:01about 650. They had been losing sleep
8:05over that number, the number that didn't
8:07even apply to them. And this connects
8:09directly back to force number one. If a
8:12couple with a delayed CPP is already
8:15getting close to $64,000 per year of
8:18government income and their actual
8:20spending is 66,000, they need their
8:23portfolio to generate 2 grand per year.
8:26The idea that they need 1.5 million in
8:29savings for that is honestly kind of
8:31absurd when you run the real math. So
8:33the second force is that most Canadians
8:35are saving towards a target that was
8:38never accurate to them in the first
8:40place. They overshoot their actual
8:42target and then they spend 30 years in
8:44retirement afraid to touch that surplus
8:47because they think they really need
8:48every dollar of it. They don't. You You
8:51probably don't. They just never had
8:54anyone show them the actual math. Force
8:57number three, your spending will
8:59naturally decline whether you plan for
9:02it or not. Now, the third force here is
9:05one that I think is absolutely
9:07fascinating, and it's the one backed by
9:10the most research, and almost no one in
9:12the Canadian retirement space ever talks
9:14about it. Your spending in retirement is
9:16not going to stay flat. It is going to
9:19decline. And not because you run out of
9:22money or because you're being really
9:23disciplined about it. It declines
9:26because as you age, you simply will
9:29spend less. The research on this is
9:32overwhelming and I want to walk you
9:34through it because I think once you see
9:36how consistent this finding is across
9:39every country where this has been
9:41studied, you'll never think about
9:42retirement savings in the same way. Now,
9:46I'm about to go full nerd mode here for
9:49a minute, so bear with me because this
9:51is genuinely important. I've got Fred
9:54Vatis's book, Retirement Income for
9:56Life, sitting on my desk at all times.
9:59He compiled findings of academic studies
10:02across five countries and every single
10:05one of them found the same thing. Let's
10:07start in Germany. In 1992, a researcher
10:10named Axel Borsch Supan, I definitely
10:14butchered that, studied the spending
10:16patterns of what he called, not my
10:18words, the very old across 40,000 German
10:23households. He found that retirees
10:25maintained their spending in real terms
10:28during their 60s, which is exactly what
10:30he expected. But what surprised him was
10:33what happened around age 70. Instead of
10:36retirees continuing to draw down their
10:38savings, their assets actually started
10:40to climb again. They were accumulating
10:43wealth in their 70s and 80s because they
10:47were spending less. And he found that
10:49the 80 year olds were saving more than
10:52the 45 year olds. The reason came down
10:55to two things. Number one, a reduced
10:57ability to spend due to declining
11:00health. And number two, a reduced desire
11:03to spend. Now, let's jump to Canada. An
11:06actuary named Malcolm Hamilton, I bet I
11:08pronounced that one right, produced a
11:10landmark study in '01 looking at
11:13Canadian seniors specifically. He found
11:15that senior couples aged 75 and over
11:18were either saving or giving away as
11:20cash gifts an average of 16.1% of their
11:24income. Couples 85 and older were saving
11:28or giving away even more. And the
11:30average income for couples 85 and over
11:33was just 31,300 per year. That's about
11:3654,000 adjusted for inflation. These
11:39were not wealthy people hoarding money.
11:42They simply didn't need to spend what
11:44was coming in anymore. Over to Sweden
11:47where David Domage and Magnus Johansson
11:50confirmed the same pattern. Swedes spend
11:54less as they age. And the explanation
11:57that best fit the data was that failing
11:59health made spending both more difficult
12:02and less enjoyable. Essentially the same
12:05conclusion as the German study. In the
12:08UK, a 2015 study by Bren Caddy and
12:11colleagues looked at two very large data
12:14sets and found a precipitous drop in
12:16spending between the ages of 60 and 80.
12:19And this is the part I really want you
12:21to hear. When they asked 80-year-old
12:24respondents about their spending, most
12:26of them said it was not constrained by a
12:29lack of money. They weren't spending
12:31less because they couldn't afford to.
12:34they were spending less because they
12:35didn't want to or they didn't need to.
12:39The tipping point in that study was
12:41around the age of 70 to 74. And then
12:44we've got a pile of US data pointing in
12:47the same direction. A 2012 study by
12:50Michael Herd and Suzanne Roweter found
12:53that real spending for college educated
12:55married couples fell by 1.23% 23% per
12:59year in the late60s, 1.75%
13:03in their 70s, and 2.75%
13:06per year in their 80s. David Blanchett
13:09at Morning Star estimated that real
13:11spending declined by about 1% per year
13:14in the first decade of retirement, 2%
13:16per year in the second decade, and back
13:19to 1% per year every year after that. JP
13:22Morgan ran their own data on affluent
13:25households and found real spending
13:27dropping by 1% per year for the first 20
13:30years of retirement. And then back to
13:33that Swedish study from '06, they
13:36calculated that the total consumption
13:38fell by 25% between the ages of 60 and
13:4180. The UK study found that the
13:44households headed by an 80year-old
13:46spends 43% less on average than a
13:50household headed by a 50-year-old. That
13:53is five countries, multiple decades of
13:57data and tens of thousands of households
14:00studied and every single one of them
14:02found the same thing. Spending goes down
14:04as you age and it has almost nothing to
14:07do with running out of money. Now,
14:09Frederick Patise based all of this
14:11research suggests that spending keeps
14:13pace with inflation until about age 70,
14:17then falls by roughly 1% per year
14:19through your 70s, about 2% per year
14:21through your 80s, and then levels off in
14:23your 90s. Personally, I believe the
14:26generation that is currently in their
14:2870s will be pushing this tipping point
14:30from 70 to about 75. People are more
14:34active, people are healthier, and
14:36they're spending longer in what I'd call
14:38the go- go years. But even with that
14:40adjustment, the trajectory will be the
14:42same. Your spending will decline. Not
14:46because you planned it to do so, not
14:49because you're being careful, but
14:50because it's just what happens. And what
14:54this means for your retirement plan is
14:56significant. If your plan assumes that
14:59you're going to spend the same
15:01inflationadjusted amount at 85 than you
15:04are at 65, your plan is almost certainly
15:07overfunding your later years. You're
15:09protecting a future that the data says
15:12is extremely unlikely to happen. And
15:15that overfunding is another reason why
15:17you'll end up with more money than
15:19you'll ever use. Now, if you're watching
15:22this and starting to wonder whether your
15:24own plan is built on assumptions that
15:26don't match reality, that's exactly the
15:29kind of thing that we look at when
15:30someone books a call with us. There's a
15:33link in the description below. But let
15:35me show you what happens when all three
15:37of these forces work together. The
15:39triple overlap. What happens when all
15:41three forces compound? So, we've got
15:44three forces working together at the
15:46same time. government benefits covering
15:49more of your spending than you'd expect,
15:51a savings target that was too high to
15:53begin with, and spending that naturally
15:56declines as you age. Each one of these
15:59individually would leave most Canadians
16:01with a surplus. But when all three stack
16:04on top of each other, they feed off of
16:07each other. Let me show you what this
16:09looks like with some real numbers. Let's
16:11take a couple, Peter and Joan. They're
16:13both 62. They've got about 600,000
16:16invested between RRSPs and TFSAs and
16:20they own their home. They're planning to
16:22spend about $5,000 per month in
16:25retirement or about 60,000 per year.
16:28Now, if Peter and Joan delay their CPP
16:31to 70 and start OAS at 65, they have a
16:34few distinct phases to walk through.
16:37Phase one, from age 62 to 65, they have
16:40zero government income. Every dollar of
16:43their 60,000 per year spending needs to
16:45come from their savings. That's about
16:47$180,000
16:49drawn down over these three years,
16:52mostly from their RRSPs as part of a
16:54strategic meltdown to reduce future
16:57taxation. Phase 2 from age 65 to 70 OAS
17:01kicks in for both of them, bringing
17:03about 17,500 per year combined. Now they
17:07only need 42,500
17:09from their portfolio. Over 5 years,
17:12that's another 212,500.
17:14So across those eight bridge years,
17:17they've drawn down roughly $392,000
17:21of their 600,000. Add some growth along
17:24the way, of course, and they're still
17:26sitting at about 230 to $250,000
17:29by the time they hit age 70. And then
17:33everything changes. At 70, their delayed
17:36CPP kicks in at the full 42% permanent
17:40increase. Combine this with their OAS,
17:43their government income is now roughly
17:4563,700
17:46per year, and their spending goal is 60
17:49grand. The government benefits alone now
17:52exceed what they actually spend. Their
17:54portfolio doesn't need to contribute a
17:57single dollar to their day-to-day life
18:00after age 70. It only needs to cover off
18:03the tax. Now, let's add force number
18:06three. By the time Peter and Joan are
18:0875, their real spending has probably
18:11dropped by about 5% based on the
18:14research we went through. By 80, it's
18:16dropped by 10%. They're spending less.
18:20Their government benefits are more than
18:23enough, and their portfolio is
18:25compounding completely untouched. By the
18:28time they're in their mid 80s, that 230
18:31to 250,000
18:33could easily turn into 350,000 or more
18:36depending on their returns. They spend
18:39less every year. They get more every
18:41year because, of course, CPP and OAS are
18:44indexed to inflation. And their
18:46portfolio has been growing in the
18:48background, hardly being touched. Peter
18:51and Joan will almost certainly finish
18:53their retirement with more money than
18:56they had at age 70 despite having spent
19:00exclusively from that portfolio for 3
19:02years and very heavily for another five.
19:05And they will almost certainly finish
19:07with more purchasing power than they
19:10needed. That is what the triple overlap
19:13looks like. It's not one force creating
19:16small surpluses. It's three forces
19:19compounding to make it nearly impossible
19:22to spend down your savings if you've
19:24done the basic planning in the first
19:26place correctly. My number one
19:29objection, but what about health care
19:31costs? Now, I know what many of you are
19:34thinking because I get it almost every
19:36day. People say, "Chad, what about
19:38health care? What if I end up in a long
19:40care facility? Won't that wipe
19:43everything out?" And I want to take this
19:46seriously because this is a major
19:48concern. Long-term care in Canada can
19:50cost anywhere from 2 to 10,000 or more
19:53per month depending on your province and
19:56your level of care. That is a
19:58significant expense. But I want you to
20:01consider a few things. First, the
20:03province health care system in Canada
20:05covers a portion of long-term care
20:07costs. You cover a portion out of
20:10pocket, too, but the system does cover a
20:12big chunk. Number two, if you look at
20:14the data we just went through, by the
20:17time people need that level of care,
20:19their other spending has already dropped
20:22dramatically. You're not paying for
20:25vacations. You're not maintaining a car.
20:27You're probably not even in the house
20:29that you lived in anymore. The health
20:32care costs don't stack up on top of your
20:35full retirement spending. They largely
20:38replace that spending that is already
20:40starting to disappear. And third, if
20:43you've structured your accounts properly
20:45and you've built up a healthy TFSA
20:47through the meltdown strategy over the
20:50years, you've got a pool of tax-free
20:52money that you can access without it
20:55affecting any of your other incomes or
20:57benefits. Now, I am not I am not telling
21:00you to ignore health care costs. Plan
21:02for them. Build them into your
21:04projection if you need to, but do not
21:07let the fear of health care expense that
21:09may or may not happen keep you from
21:12using the money you save for the
21:14retirement that is definitely happening
21:17right now. Because fear without actual
21:21numbers or data is not planning. It's
21:24just anxiety with a financial tilt. So
21:27what do you do about this? How this
21:30should change your planning? So, if all
21:32of this is true, and I believe the data
21:34is very clear that it is, what should
21:37you actually do about it? The first
21:39thing is to run the real math in your
21:41CPP and OAS. Don't guess. Log into your
21:45My Service Canada account. Look at your
21:47actual CPP estimate and calculate what
21:50your combined government benefits will
21:52be, especially if you delay. Then,
21:55compare that to what you actually spend
21:57every month. Again, don't guess. Not
21:59what you think you spend, what you
22:01actually spend. Most people who do this
22:04for the first time are genuinely
22:05surprised by how small the gap is. The
22:08second thing is to stop anchoring your
22:10retirement savings target to a number
22:13that you read in an article that doesn't
22:15know who you are. Those benchmarks are
22:18built on generic assumptions that
22:20probably don't apply to you. Get your
22:22actual number based on your actual
22:24spending and your actual government
22:27benefits and your actual accounts. The
22:29third thing, and this is the one most
22:31people resist, give yourself the
22:34permission to use what you've built. I
22:38know how hard this one is. You spent 30,
22:42sometimes 40 years training yourself to
22:45save. Every dollar saved was a win.
22:48Every dollar spent unnecessarily felt
22:51like a failure. And now here I am
22:53telling you to flip that switch. That
22:55can't be easy. I I get that. But I want
22:59you to think about something. I have sat
23:02across from people in their 80s who have
23:05more money than they have ever had in
23:08their lives. And do you know what they
23:09talk about? They do not ever talk about
23:13their portfolios. They talk about the
23:15trips they wish they had taken. They
23:18talk about the things they wish they had
23:20fixed. They talk about the grandkids
23:22that they wish that they had helped out
23:24sooner, started a business with them,
23:26something like that. You did not save
23:29your money to die with it. You saved
23:31your money to use it. The research from
23:33five countries and multiple decades is
23:36telling you the same thing. You will
23:39almost certainly not run out. The real
23:41risk is that you run out of time while
23:44your money just sits there. And that is
23:47the part that no spreadsheet will ever
23:49show you. So that's why most
23:52well-prepared Canadians will never
23:54actually spend their retirement savings.
23:57But one of the biggest levers in
23:59everything we just talked about today
24:01was the timing of your CPP. Taking it at
24:05the right time versus the wrong time can
24:07be the difference between your
24:08government benefits covering most of
24:10your spending or barely making a dent.
24:14And the math on this decision is not
24:16what most people assume, which is
24:18exactly why I made this video right
24:20here, where I walk through the real CPP
24:24timing math that no one else really
24:25shows you, including including when
24:29delaying actually does not make sense.
24:32That's the next one for you to watch.
24:34I'll see you there.
24:38>> [music]

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