If commercials are anything to go by, retirement is supposed to be a time for seniors to kick back and enjoy the hard-earned fruits of their labour. But many retirees seem to have a hard time shifting from saving to spending mode — even when they have the money to spend.
Linda Shick, senior VP and portfolio manager at the Angas Shick Group at Raymond James in Toronto, estimates that most of her clients have a tough time making the shift. “They find it hard to spend on luxuries or what they think of as frivolous things. Sometimes they’re okay with spending the income generated by their capital, but are very uncomfortable touching the capital itself. They really don’t like to see that line declining on the graph.”
“2008 scared a lot of people, and it’s still fairly recent in people’s minds,” adds Anne Jackson, a CPA and wealth- and estate-planning specialist at Canaccord Genuity in Vancouver. She sees more clients who spend too little than those who spend too much. “A lot of these clients have an underlying distrust of the economy and little confidence in today’s markets. People don’t trust that their money is safe and that it’s going to last, so they tend to hoard it.”
That kind of mindset can erode clients’ quality of life. It took Shick some work to convince one client, who flew annually to visit family in India, that she could not only take a direct flight, but also pay for a business-class seat. “She was getting older and wasn’t travelling as well. I actually had to get online with her and research flights and their costs and say, ‘It’s okay to spend this money. You don’t want to be uncomfortable and to arrive and get sick.’ ”
To help clients cope, both Shick and Jackson prepare plans and scenarios that show clients they won’t outlive their assets. They’ll model budgets for each age and stage of life, factoring in differing rates of return, levels of inflation and what ifs, like the need for long-term care, selling a principal residence, or buying a warm-weather home. The goal is to show clients what they can spend at each stage — and that it’s okay to do so.
It’s also important, says Jackson, to show clients how they can withdraw from different portions of their portfolio, and to model the tax implications and efficiencies of withdrawing from an RRSP, a TFSA or non-registered savings. Many clients will delay withdrawing from RRSPs, even when it’s more tax-efficient to do so, she says. Rather than waiting until age 71 to convert RRSPs to RRIFs, she’s now recommending that more clients start withdrawing immediately upon retirement. At a traditional 4% withdrawal rate, she says, many wealthier retirees simply can’t spend their entire RRSP savings from age 71 until a death at 90 or 95. When there are leftovers (and potentially no spouse to take the rollover), it goes to children, creating a big tax bill.
Both advisors also point to the social risks of not spending. Clients can become isolated when they shy away from spending money on restaurants, outings with friends, or sports and cultural events.
Then there’s the cost of lost dreams. Shick encourages younger retirees to travel while they’re still mobile. She worked with one client who sold her home four years ago to travel extensively. “Now she’s not as healthy and has slowed down, and is very grateful to have taken the trips she did.” Shick draws on her knowledge of her clients’ interests to suggest things they might like to do. For instance, why not buy season tickets to the theatre, or splurge on the best tickets in the house? “The extra $100 is negligible in the overall scheme of their portfolio.”
Still, some clients take convincing. Widowed women, Shick finds, are often uncomfortable when it comes to having control of their entire portfolio. This group, she says, tends to want to hold onto a lot of cash, which may not be the best strategy. Again, it’s a matter of running the scenarios “and keeping a little more cash on hand than I otherwise might recommend.”
Sometimes, frugality can be downright dangerous. Shick recalls one client who was diagnosed with cancer, and insisted on taking the subway home from chemotherapy treatments, rather than a taxi. “She wasn’t even spending all the income from her capital. In fact, she was still actively saving. I heard about the transit thing from her daughter, and I called her and said, ‘You need to take a taxi. You can afford it, and you’re putting yourself in danger by taking transit.’ ” Eventually the client conceded. She also began taking taxis to socialize with friends.
Cars are another sticking point. Many seniors will buy a vehicle right before they retire, says Jackson, “then expect to drive it for the next 30 years. They’ll hit 70 or 75, when they need a safer vehicle, and then forgo it because they think it’s a huge chunk of money. But really, $30,000 or $35,000 for a decent car doesn’t create a huge dent in your half-million dollars in retirement savings.”
The advisors agree that helping clients get comfortable with the shift from spending to saving is an ongoing process — one that can last several years. They’ll bring it up with clients at annual meetings, and at significant events like retirement, a medical diagnosis, the death of a spouse, remarriage or selling a principal residence. Those events can change a person’s financial mindset.
Shick, for example, recalls one frugal client who complained to her for years about “watching money managers running around in their BMWs and Ferraris, spending money on frivolous things.”
About a year after his wife died, she got a call from the man.
“I just bought a Porsche,” he told her.
That significant event, she says, made him feel as if he could buy something frivolous. Still, old habits die hard. Even with the change, says Shick, the client displayed his characteristic frugality: “It was a used Porsche.”