Retirement can mean a major adjustment in spending for many people, mainly because their income drops. And there’s new evidence that incomes may drop significantly as people grow old, particularly when employment earnings are no longer the main source of income.

The largest drop in income occurs in the 55- to 64- and the 65- to 74-year-old age groups as labour market attachment diminishes, says Raj K. Chawla of the labour and household surveys analysis division of Statistics Canada in Ottawa.

It may take time for seniors to adjust to their changed circumstances, says Chawla. They may spend more than their income, running down savings or incurring debt to maintain their lifestyles. Homeowners may have to downsize and move to rental accommodations. And out-of-pocket health expenses may take up more of the household budget, particularly when the costs are no longer covered by an employer.

In a new study of changes in the spending patterns of older Canadians, Chawla looked at three household groups, based on the age of the “reference person,” a term StatsCan uses for the person identified as the one mainly responsible for the financial maintenance of the household. His findings could serve as a cautionary tale for advisors to bring to the attention of their pre-retirement-age clients.

Three age groups — 55 to 64, 65 to 74 and 75 or over — formed the study, and Chawla compared their incomes and spending patterns in 1982 with the spending patterns of those age groups in 2003.

The situation of the oldest group seems to be deteriorating. In 2003, he says, almost one-third of Canadians aged 75 or older received their entire income from government transfers, compared with less than one-fifth in 1982. The majority of people in that situation were older women on their own, but one-quarter were couples.

In both 1982 and 2003, three-quarters of households in the 55 to 64 age group had employment earnings, accounting for more than 70% of their income, Chawla says. For those in the 75-plus group, however, government transfers and other income sources — mainly pensions — became more important as sources of income, rising from 59% of income in 1982 to 80% in 2003. More than half of households in the 55 to 64 group, with earnings as the major source of income, had incomes of $50,000 or more; while the majority in the 75-plus age group (39%), with pensions and transfers as their major source of income, received less than $20,000.

Although more households in the 75-plus group reported earnings in 2003 than in 1982, the share of income from earnings fell to 9% from 12%. The share of income from investments also fell for the group, to 10% in 2003 from 29% in 1982 (please see lower table).

Some of that decline may be the result of the precipitous drop in interest rates over the period. Chawla notes the bank rate, which averaged 14% in 1982, had dropped to 3.2% by 2003.

As a group, the 75-plus households had higher incomes in 2003, mainly because the maturity of the Canada/Quebec Pension Plan resulted in more recipients and higher benefits, as well as the presence of inflation-adjusted payments from other programs, says Chawla. Despite increased incomes, 42% of the households spent more than their income in 2003, compared with 35% in 1982. The corresponding proportions for households in the 55 to 64 age group were 62% in 2003, vs 53% in 1982.

All types of households (including both couples and individuals on their own) spent more of their income on personal consumption in 2003 than in 1982, Chawla says. In 1982, the 55 to 64 group spent $34,200 while those aged 75-plus spent $16,700. By 2003, spending had reached $43,500 and $22,000, respectively. (All figures are in 2003 dollars.) The widening gap between working and non-working households largely reflected greater spending by working households, says Chawla.

Spending on health has also increased over the 20-year period, as premiums for government and private health insurance rose and out-of-pocket costs for treatments and medicines not covered by insurance went up. Since supplementary medical coverage through a private insurance plan is often a benefit of employment, he notes, the proportion of households covered under such schemes declined between the 55 to 64 group and the 75-plus group.

@page_break@Not only are more households in the 75-plus group incurring more out-of-pocket health expenses, he says, but the direct costs also make up the lion’s share of their health spending. For unattached women, for instance, the percentage grew to 81% in 2003 from 78% in 1982. Besides health insurance, all households, regardless of age, spent more on prescription drugs and other medial equipment and appliances, he says.

Not surprising, the composition of households changes notably as the inhabitants age. In both 1982 and 2003, says Chawla, slightly more than one-third of households in the 55 to 64 age group still contained children or other relatives, with the remainder being unattached individuals or couples. By 65 to 74, however, households consisted largely of couples and unattached women. In the 75-plus group, unattached women predominated, accounting for slightly more than 40% of households.

Smaller households lead some older people to downsize and move to rental accommodations. For instance, between the 55 to 64 and the 75-plus age groups, the proportion renting increased to 43% from 28% in 1982 and to 36% from 24% in 2003.

Almost 36% of households in the 75-or-older age group were renters in 2003, compared with less than one-quarter of those aged 55-to-64 who rented accommodations. IE