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Retirement is more expensive than you think, and that’s a problem

One of the assumptions about retirement is that your expenses will drop by about 30 per cent once you leave the workforce. It’s a comforting nugget that allows people to sleep a bit easier ahead of the big day when your paychecks stop forever.

But recent data from Franklin Templeton Investments suggests assumptions aren’t matching reality, and that drop in costs isn’t materializing for many retirees.

According to Franklin Templeton’s 2016 Retirement Income Strategies and Expectations survey, 43 per cent of retirees found that their expenses actually increased after retirement, up from 33 per cent in last year’s survey. In contrast, only 32 per cent of retirees found that expenses went down.

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It’s a number that flies in the face of conventional wisdom, but isn’t exactly a surprise to retirement experts who have been watching retiree expenses rise for years.

Matthew Wiiliams, head of defined contribution and retirement for Franklin Templeton Investments, said at least part the sharp year-over-year jump in costs can be explained away fairly simply.

“I think a big thing for Canada, specifically for 2015, was the collapse of the Canadian dollar,” he says.

Fair enough. On a retirement income, the effects of the sinking loonie can be a major issue, with food and consumer products pricier, and snowbirds who spend their winters in Florida and Arizona are paying more to do so.

But even factoring that out, we have a significant chunk of retirees facing a reversal of the expected path of post-retirement expenses. Part of the issue, says Williams, is that while assumptions about costs have remained somewhat entrenched, the lifestyle of the modern retiree has changed.

Life begins at 70

“The first (issue) is you have the baby boomers who are arguably the most active retirement generation ever seen, so they’re wanting to pack everything into that part of their active retirement, which is actually the first 10 years.”

In other words, it’s great that 70 is the new 50, but what it means is that the grandmas and grandpas of today aren’t content with wiling away their days on the patio playing rummy. Instead, retirees are doing basically what any typical middle-ager would want to do if they had all the time in the world: travel, eat good meals and get outdoors. Matching that with a shrinking budget can be tricky.

And Williams notes that the oldest members of the Baby Boom generation are still a relatively spry 70.

“I know a lot of 70 year olds who are in fantastic health who are just spending more in that discretionary phase,” he says.

Costs have changed from 20 years ago

Along with healthier old age come longer life spans, which while undeniably good, also change the calculus of retirement.

“One of the largest drains I see when I deal with clients are the health care costs that they didn’t necessarily factor in to their retirement plans,” says Christopher Dewdney, a certified financial planner with Dewdney & Co.

This could be partly due to the natural (often incorrect) assumption that however things are will continue. So even though you know that aging leads to health problems, it can still be a nasty surprise when health-related costs start popping up.

But Dewdney also points to the changing nature of pensions, from the defined benefit plans of years past to the self-directed plans of today, where retirees are footing more of the healthcare bill.

“A lot of companies in the past used to offer large robust retirement packages that not only included monetary replacement, but also in the structure, extended health care benefits throughout the retirement,” he says.

“Now those are few and far between.”

And along with higher health care costs, people are increasingly hitting 65 with mortgage payments still to make and car loans still on the books.

Basically, the world has changed, and the numbers from the retirement pamphlets the seniors of today were reading 20 years ago no longer apply.

Set new expectations

“First thing we tell people is all of these general rules of thumb like how expenses will decrease by 30 percent, people really need to throw them away,” says financial blogger and author Jim Yih.

He says the trick is to instead focus on your particular needs.

“I always get the question, ‘what does the average person spend in retirement’, and my response is, ‘who cares? It doesn’t matter if someone else spends xx dollars or not. What really matters is how much you spend,” he says.

He offers the example of someone paying off his or her mortgage ten years before retirement, and having to deal with the extra cash on hand.

“What do most people do, do they save more or spend more? Probably a little bit of both, so what happens is their spending adjusts automatically,” he says.

So by the time you reach retirement, you’ve found new things to spend your money on, and these new things may be tougher to say goodbye to when the tough spending decisions have to be made.

Larry Moser, a vice president at BMO Wealth Management, says would-be retirees need to throw out old assumptions and realign their expectations for retirement, whether that means working a few years longer to build up their fund, or accept lifestyle limitations after they retire.

“I think we have to work backwards and say if this is the amount I can save for retirement and I need it to last me xx amount of years, I have to plan my retirement according to that,” he says.

“They have to be more realistic in terms of what they’re going to spend in retirement than some people are, because the last thing you want to do is blow your entire retirement nest egg in the first ten years.”