Government-Provided Retirement Income Won’t Cover Canadians’ Essentials

According to the report, “Spending patterns in retirement,” the average annual income of retirees ages 65 to 74 is $35,200. Government transfers such as Canada Pension Plan and Old Age Security make up $18,300 of that annual income. In comparison, higher net worth retirees aged 65 to 74 with average annual incomes of $82,800 received $19,900 in government transfers.  

Russell notes that these government transfers are generally not sufficient to cover all of the essentials of retirement – 70% coverage for the average retiree, and 39% for higher-income retirees. For retirees with annual incomes of $35,200, over $27,100 of that cash flow was needed to pay for yearly essential expenses. Retirees with incomes of $82,800 a year spent $51,000, of their income on essentials.  

Almost 75% of essential expenses for retirees ages 65 to 74 related to shelter (37%), transportation (21%), and food (18%).  

“To underestimate essentials expenses would be a great risk, since it represents the bulk of expenses in retirement – all of which will not necessarily be covered by government transfers,” said Fred Pinto, Managing Director of Distribution Services at Russell Investments Canada Limited, in a press release.  

Aside from essentials, Russell found that retirees with average annual incomes of $35,200 spend $7,300 on lifestyle expenses, while retirees with average incomes of $82,800 spend $20,900 on lifestyle activities. According to the report, dining out and vacationing are the two largest lifestyle expenditures among retirees ages 65 to 74. However, lifestyle expenditures vary, and the amount retirees spend on splurges such as vacations, tobacco products, and gaming/gambling appear more widespread than money used on essentials.

Spending Declines in Retirement  

Russell research unveiled that 58% of Canadians are "very or somewhat" concerned about outliving their money 10 years leading up to retirement. However, once they actually reach their retirement date, that figure drops to 38% of those who are concerned. Furthermore, only 29% of retirees are overly concerned about outliving their money after the first and second year of retirement, and that number drops to 18% after 10 years into retirement.

“Retirees' sense of financial comfort and well-being can be attributed to the realization that many household expenses are reduced or eliminated around the time of retirement, including mortgage payments, income taxes, and costs associated with raising and educating children. Another item that is often overlooked is that retirees no longer have the expense of saving for retirement," explained Pinto, in the press release.  

Russell found that household expenditures in retirement for those in the 60-64 age group totaled $38,100 - with $25,000 going to essentials, $7,600 for lifestyle expenses, and $5,500 earmarked for income tax. The retirement expenditures drop to $30,300 for the 75-79 age group.  

"Even though spending and expenses decline in retirement, it is still very important to continue to grow your portfolio to protect against inflation and rising costs such as health care," Pinto said.  

Findings in the report are based on Russell's retirement research and a detailed analysis of a Statistics Canada survey of household spending.  

For access to the report, visit http://www.myfinanciallyhealthyretirement.com.