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Two senior citizens enjoy the early morning calm of the Gulf of Mexico at Bonita Beach, Fla.

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Retirees are not spending their savings anywhere nearly as quickly as academics think they should. That is the conclusion of a study published earlier this month by the Employee Benefit Research Institute. The study compared the current assets of retirees with the assets they had at the time of retirement 17 to 18 years ago.

Retirees in the study were divided into three groups based on their non-housing assets at retirement. The most affluent group were people who had retired with more than $500,000. Eighteen years later, their median level of savings had dropped a mere 11.4 per cent. In other words, they still had nearly 90 per cent of the money they started out with. This was only the median result; 35.5 per cent of the retirees in that group actually had more assets 18 years after retirement.

People in the second group started out with $200,000 to $500,000. They also managed to preserve most of their wealth with 36.8 per cent of them having more assets 18 years later.

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While the study covered only American retirees, it is a near-certainty that Canadians have preserved as much of their money, if not more. First, our seniors enjoy a comprehensive public health-care system that shields them from ruinous medical expenses. Second, stock market returns in Canada have been considerably better than in the United States since 2000.

There is also the less scientific but still credible perception that Canadians are naturally more cautious than Americans and that this caution carries over into our spending habits. In summary, if American retirees are not spending their savings, then neither are Canadians.

From a Canadian perspective, there are several ways to explain this rather startling result. The first theory is that middle-class Canadians have been saving too much. This may seem like a bizarre notion when we are only months away from enhancements to the Canada Pension Plan, but we must nevertheless give it some serious weight.

If the main purpose of saving for retirement is to provide a steady stream of income for life, and so much of the money is being left untouched, then it certainly looks like we saved too much. In a 2016 report, Canadian Imperial Bank of Commerce estimated that Canadians aged 50 to 75 will inherit a mind-boggling $750-billion over the next decade.

The second theory might sound closer to the truth. Rather than having saved too much, it may be more a matter of retirees spending too little. This sounds like the same thing but it is subtly different. Under this theory, retirees might very well want to spend more and enjoy a better lifestyle, they just can’t bring themselves to do it because of a lingering fear of running out of money some day.

Even Theory No. 2 leaves something to be desired. It doesn’t explain the spending behaviour of retirees in the last stage of their lives. In their 80s, retirees should be spending more freely because uncertainty is no longer a factor, but this is not what happens. By sifting through data from Statistics Canada, pension actuary Malcolm Hamilton found that senior couples 85 and older either save or give away as cash gifts about 25 per cent of their income. The older retirees get, the more they save.

This brings us to the third and to my mind the most plausible theory to explain why retirees underspend. New retirees are fully aware that they may have 25 or more years of retirement living ahead of them. They are keen to spend more in their early retirement years but know that doing so might lead to grief later on. After all, investments could do poorly or unexpected expenses could arise. As a result they underspend in their 60s and early 70s. So far this sounds like Theory No. 2.

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What happens next is that the reason for underspending morphs into something else around the midpoint of their retirement. By the time it starts to become evident that they could afford to spend more, they are no longer inclined or able to do so. When most people reach their late 70s, exotic travel becomes less alluring or may even be physically impossible. Expenditures on durable goods such as cars, appliances or furniture also drop off as do outings at restaurants and entertainment venues. Yes, it might become necessary to pay for long-term care but significant costs in this area are an issue for only a small fraction of seniors. The rest of them will see their assets continue to grow until death.

If Theory No. 3 is true, then Canadians should be spending more in their 60s and early 70s, when they could really enjoy it. Two things need to happen to give them the confidence to do so. First, new retirees have to get a better handle on how much they can safely spend. There are various tools that are available at no charge that make this possible (for example, visit enhancement4.morneaushepell.com). Of course, financial advisers can also help in this regard. This should be an ongoing exercise since the amount one can safely spend needs to be constantly adjusted up or down in future years to meet changing circumstances.

Second, retirees should use a portion of their savings to increase the level of safe income they have. This will involve taking actions that many if not most Canadians find distasteful such as buying annuities or delaying the start of their Canada Pension Plan, but strategies like these can help retirees enjoy their life savings more fully.

Frederick Vettese is a partner at Morneau Shepell. He is also the author of Retirement Income for Life: Getting More without Saving More.

Rob Carrick talks with Jeff Gray of Proteus Performance about the options you have when preparing your pension for your retirement.
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