WHAT TYPE OF RETIREE ARE YOU?
In the following excerpt from his new book, Retirement Income for Life, Fred Vettese breaks down the four basic types of retirees.
There are a lot of things you could put on your wish list once you’ve retired, like DIY projects around the home, escaping winter in Florida or enhancing your culinary skills. Even though these activities sound totally unrelated, they all have something in common: they fall under the heading of regular spending. In that sense, they are the same as paying the food bill or buying car insurance. Regular spending would also include child-related expenses if grownup children are still on your “payroll” after retirement. (Unfortunately, that is becoming more common in this era of boomerang children. Just remember your kids don’t like it any more than you do.)
If you had to worry only about regular spending, then a one- size- fits- all decumulation strategy might work. Two other spending buckets also compete for your precious savings, though. One of them I call “rainy day” spending and the other is bequests. The priority you place on each of the three spending buckets defines the type of retiree you are.
Regular spending ( bucket No. 1) consists of all reasonably predictable and repeatable expenses such as food, tobacco and alcohol; routine home maintenance; hobbies; travel; utilities and insurance. These expenses will tend to be similar from one year to the next, though some are purely discretionary. Rainy day spending ( bucket No. 2) involves expenses that you cannot easily anticipate and cannot ignore when they arise. They include big- ticket items such as major medical or dental expenses, an urgent request for money from a grown-up child or major home repairs.
Bequests (bucket No. 3) are gifts of property by will; that is, the amounts you pass on to specific individuals or institutions when you die.
I see four basic types of retirees.
TYPE 1: THE MAINSTREAM RETIREE
Type 1 is the mainstream retiree, who held down a job, bought a home, raised children and paid taxes. (As Anthony Quinn declared in Zorba the Greek, “Wife, children, house, everything. The full catastrophe.”) At the high end of the income scale, Type 1s are professionals, executives and successful entrepreneurs. The less affluent Type 1s also had steady jobs for the most part and earned a reasonably comfortable living. What they all have in common is a desire to maintain their lifestyle after retirement and avoid nasty surprises.
While Type 1 retirees would not mind a financial windfall, they won’t take big risks to make it happen. They don’t worry too much about rainy day spending because the only spending shocks they can imagine are those they can absorb with a year or two of belttightening following the shock. Finally, Type 1 retirees are not prepared to reduce their spending much, if at all, in order to make room for bequests. That is what the equity in the house is for. By the way, Carl and Hanna, the retirees I follow in this book, are Type 1s.
TYPE 2: THE CLEAVERS
I call Type 2 retirees the Cleavers, not the butcher knife variety but rather the TV family from the iconic Leave It to Beaver show of the 1950s. Ward and June Cleaver would have been mainstream retirees were it not for the “Beaver” ( son Theodore). The Beaver got in trouble in virtually every episode as a result of exhibiting consistently poor judgment. A real- life Beaver would find it difficult making his way through life on his own, which is why parents like the Cleavers figure they will need to continue providing financial support for their children, possibly even beyond the grave.
Anecdotal evidence suggests that the Cleavers are a surprisingly common retiree type. I have many friends and acquaintances around retirement age who are quietly making provisions for a grown- up child who, they fear, might not otherwise be able to cope.
TYPE 3: THE SUPER-SAVERS
Type 3 retirees are the super-savers, people who could never bring themselves to spend lavishly.
They regularly socked away a little more for retirement than they thought they would need, “just in case.” Academics used to put this behaviour down to memories of the Great Depression, but Type 3s still exist. In their working lives, they would have behaved much like mainstream retirees, only with more saving and less spending.
In retirement, the same pattern will most likely continue. They are almost certain to end up with a significant amount of unspent capital when they die. Of course, there is a chance that their retirement security could still be jeopardized by a variety of rainy day situations.
TYPE 4: THE YOLOs
Then there are the Type 4 retirees, whom I label the YOLOs, as in “you only live once.” YOLOs will want to spend more extravagantly in their early retirement years, even if it dims their longer- term prospects. Some people favour immediate gratification and so they are YOLOs by nature. Others become YOLOs because they think their life expectancy is shorter than normal and want to enjoy life while they can. Still others can expect a normal lifespan, but they buy into the notion that disability-free life expectancy is apt to be fairly short.
( They might have gotten that idea from my last book.) YOLOs do not want to be destitute in old age, but their bigger fear is ending up with a great deal of unspent wealth. In my experience, YOLOs in Canada are rare. This is a little strange, as their philosophy seems perfectly rational, provided they exercise at least a modicum of spending restraint.
Sometimes, one type will blend into another. For example, the Cleavers will save more than average and will be difficult to distinguish from super- savers. Both save more than average, just for different reasons. Still, there are some differences in the priorities they place on each spending bucket.
The relative importance of each spending bucket varies by retirement type. I have tried to summarize the relationship in the table (below).
The reader might note that I have left out low- income households in my description of retiree types. By low income, I mean people in the bottom 30 per cent of the income scale. This is not because their needs are less important but because they have much less need of a decumulation strategy than their higherincome counterparts. Most, if not all, of their income comes from defined- benefit sources like OAS, CPP and other government programs. In fact, most of them can expect to receive more after-tax income after age 65 than they ever enjoyed when they were still working, even if they never saved a penny.
And where does the worrywart fit into my scheme?
You might think that retirees who worry a lot about their financial situation might be a separate type; but in reality, I have witnessed a spectrum of worry within each of the four types above. Some people will fret more than others by nature, whether they have reason to do so or not. My late father had accumulated considerable wealth in his lifetime thanks to some shrewd investments in real estate back in the 1960s, and yet he still had lingering concerns in his late 80s that his money would run out. Nothing could have been further from the truth, though. He lived very frugally to the end and my best guess is that he would have had enough money to last him and my mother until about age 300. To be sure, he was an extreme case. My father would definitely have been a super- saver. Perhaps he rests easier knowing his grandchildren will benefit from the legacy that his super-saving made possible.
Most anxiety in retirement, in fact, stems from the unpredictability of one’s income stream, not the absolute level of income. If you had low but certain income, you might be miserable (or not) but you wouldn’t be particularly anxious. Surveys show that retirees whose retirement income is variable (because they are living off their savings) are more likely to remain in a state of anxiety long after they retire. This response is totally rational. To a large extent, that is why I wrote this book— to offer an alternative decumulation strategy that will wring out much of the variability and lessen anxiety.
Perhaps the luckiest retirees from a financial perspective are those who have ample pensions from defined benefit ( DB) pension plans. They tend to worry less about finances in retirement and spend more freely. Unfortunately, DB plans are dying out ( except in the public sector) because of the financial strain they place on employers. Fewer than 10 percent of all workers in the private sector are still members of DB plans and this percentage will keep dwindling, as most DB plans are now closed to new members.
The most important result that comes from a smart decumulation strategy is the ability to produce a stream of income that is stable and predictable, almost as if it came from a DB plan.
YOU MIGHT THINK THAT RETIREES WHO WORRY A LOT ABOUT THEIR FINANCIAL SITUATION MIGHT BE A SEPARATE TYPE; BUT IN REALITY, I HAVE WITNESSED A SPECTRUM OF WORRY WITHIN EACH OF THE FOUR TYPES — FRED VETTESE, AUTHOR, RETIREMENT INCOME FOR LIFE