For years, the "retirement spending smile" has been a guiding metaphor for how Canadians plan their finances after leaving the workforce. But what if this popular image is setting the wrong expectations and causing retirees to live too frugally during their best years?
The Misunderstood Metaphor
The concept of the retirement spending smile was introduced by David Blanchett, head of retirement research at Prudential Financial Inc., in a 2014 paper published in the Journal of Financial Planning. The idea paints a picture where spending is high in early retirement, dips in the middle years, and then surges again at the end of life due to healthcare needs, creating a curve that resembles a smile.
However, the enduring popularity of the "smile" imagery often overshadows the paper's crucial finding: retirement spending actually declines at an average rate of 1 per cent per year throughout retirement. The slight uptick at the very end does not bring spending back to its initial levels. Instead, the pattern resembles a lopsided smirk, with final expenses remaining far below the spending of a retiree's active 60s and 70s.
Real Consequences for Canadian Retirees
This distinction between a symmetrical smile and an asymmetrical smirk has significant practical implications. When individuals plan for two equal spending peaks, they often hoard too much capital for a feared end-of-life spending surge that frequently fails to materialize at the anticipated scale.
The result is unnecessary frugality during the decades when retirees are most healthy and capable of enjoying travel, hobbies, and time with family. By preparing for a dramatic cost curve that isn't supported by data, many Canadians live more conservatively than needed during their most vital retirement years.
This caution is particularly pronounced in Canada, where the public healthcare system provides a significant buffer. Blanchett's research is based on U.S. data, where out-of-pocket medical costs are substantially higher. If the spending pattern is already a smirk in the U.S., the end-of-life spike is even less concerning for Canadians. Yet, many still budget as if facing American-sized medical bills.
Liberating Retirement Spending
The good news is that understanding the true shape of retirement spending can be liberating. Recognizing that spending naturally declines as activity decreases allows for more confident "front-loading" of enjoyment in early retirement.
This doesn't mean ignoring future healthcare or long-term care needs, but it does shift the focus. The typical pattern shows declining discretionary spending, not escalating overall expenses. Canadians can feel more secure allocating funds for experiences earlier in retirement, rather than over-reserving for a distant future where they will likely spend less.
As Adam Chapman, a Certified Financial Planner and founder of YESmoney in London, Ont., implies, the metaphor we use to plan decades of life matters. It's time to retire the symmetrical smile and embrace the reality of the spending smirk—a shape that, for most retirees, should lead to a more fulfilling and less anxious retirement journey.
