TORONTO, June 11 /CNW/ - Where do Canadian retirees derive their income? How do they spend it? And how much will they need for a financially healthy retirement? These are some of the questions answered in a new report by Russell Investments Canada Limited, entitled: "Spending patterns in retirement" - based on Russell's retirement research and a detailed analysis of a Statistics Canada survey of household spending.
"We believe that a financially healthy retirement is well within reach for most Canadians. However, factors such as income level, marital status, age, and retirement date must be taken into account and planned for. This latest report was designed to help Canadians be aware of these factors and stay on top of their retirement goals," says Fred Pinto, Managing Director of Distribution Services at Russell Investments Canada Limited.
"At a time when many are planning summer vacations, now is a good time as any to talk with a financial advisor and further define a retirement plan that can cover all your future expenses and spending."
On average, over 50% of retirement income comes from government transfers
According to the report, the average annual income of retirees aged 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.
However, these government transfers are generally not sufficient to cover all of the essentials of retirement - almost 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.
"It's critical to have enough income to cover the essentials of retirement, such as food, shelter, and transportation. And virtually all retirees also want to have enough income to cover the lifestyle expenses that make retirement enjoyable, such as travelling and dining out," says Pinto.
"More important than what one earns in retirement is determining what one needs to spend in retirement. That's why Russell's "ELE" retirement planning solution divides retirement into three distinct spending categories: Essentials, Lifestyle, and Estate."
Almost 75% of essential expenses for retirees aged 65-74 related to shelter, transportation, and food
Shelter (37%), transportation (21%), and food (18%) were listed as the largest essential retirement expenses for those in the 65 to 74 age group.
"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," says Pinto.
Top retiree lifestyle expenditures: Travel, dining-out, alcohol
"Once a more precise estimate of essentials expenses is determined, retirees will have an idea of what is left over for lifestyle expenses," says Pinto.
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 Russell's report, dining-out and vacationing are the two largest lifestyle expenditures among retirees aged 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.
Declining expenditures in retirement
Russell research also 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. 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," explains Pinto.
According to Russell, 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," says Pinto.
"Canadians preparing to retire can feel encouraged knowing that a high percentage of retirement portfolio returns could be generated through investments during retirement. That's why it is important to remain invested in some allocation to equities during your retirement years. You need to continue to grow your portfolio to protect against inflation and rising costs such as health care. Keep in mind that it's not the end of the investment journey when you stop working."
For access to Russell's full "Spending patterns in retirement" report, please visit www.myfinanciallyhealthyretirement.com or contact Thien Huynh at: 416-640-2529
About Russell Investments
Founded in 1936, Russell Investments is a global financial services firm that serves institutional investors, financial advisers and individuals in more than 40 countries. Over the course of its history, Russell's innovations have come to define many of the practices that are standard in the investment world today, and have earned the company a reputation for excellence and leadership.
Through a unique combination of wide-ranging and interlinked businesses, Russell delivers financial products, services and advice. A pioneer, Russell began its strategic pension fund consulting business in 1969 and today is trusted by many well-known worldwide institutions for investment advice. Russell's global consulting assets total approximately $813 billion CDN. The firm has $184.9 billion CDN in assets under management (as of 12/31/09) in its mutual funds, retirement products, and institutional funds, and is well recognized for its depth of research and quality of manager selection. Russell offers a comprehensive range of implementation services that helps institutional clients maximize their assets. The Russell Indexes calculate over 50,000 benchmarks daily covering 65 countries and more than 10,000 securities.
Russell is headquartered in Tacoma, Washington, USA with offices in Amsterdam, Auckland, Chicago, Johannesburg, London, Melbourne, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. Russell Investments Canada Limited is a wholly-owned subsidiary of Frank Russell Company. For more information about how Russell helps to improve financial security for people, visit us at www.russell.com/ca
SOURCE Russell Investments Canada Limited
For further information: For further information: Thien Huynh, 416-640-2529; Katita Stark, 416-929-9100