What’s Right for You? Straight-Line Spending vs. Layered Spending

Welcome back to your favourite blog for pre-retirees and retirees in Canada. We are now in our 11th edition (my lucky number) on this beautiful Fall Day in the Niagara Region. The leaves are turning and so is the weather, brrrr…. so get your favourite cup of coffee or tea and settle down for this month’s edition.

You may have read about spending approaches in past blogs but today we dive deeper so you can decide which is right for you and your life. Generally, our spending fluctuates, and retirement is no different than your working years in that regard. Expenses come out of nowhere, so it is key to have your spending “style” determined ahead of time. It’s not to say your approach can’t change…. of course it can! However the more you prepare for spending, the more comfortable you will be to enjoy your hard-earned money.

Below is an example of my artistry or lack thereof 😊 It is a visual format of straight line vs. layered spending to help you see the difference & can refer back to, as you read this article.

What is Straight-Line Spending?

Straight-Line Spending is an approach where your monthly/annual spending amount stays consistent throughout your retirement years. It’s relatively simple – you determine how much you need to live off for your lifestyle depending on several factors: what are you spending your money on, how much you can afford given your income sources (CPP, OAS, Pension, Investments, Rental Income, Business Income, etc.), inflation, life expectancy, etc. Some advantages and disadvantages of Straight-Line Spending include:

Advantages

1. Budgeting Ease: With a consistent amount it is easier to budget for and track if you are living within your means.
2. Peace of Mind / Predictability: Knowing exactly how much money will be available each month can provide peace of mind, giving you the control / freedom to plan activities and purchases without the stress of fluctuating income.

3. Reduced Lifestyle Inflation: Sticking to a consistent spending plan can help prevent lifestyle inflation, where increased spending habits usually drain savings and investments over time.

4. Flexibility for Adjustments: Having a consistent baseline spending can provide flexibility to adapt to changing circumstances if you have money available for emergency need for cash such as vehicle repairs, children’s weddings, etc.

Disadvantages:

1. Inflexibility: As expenses change, such as unexpected healthcare costs, you may find it challenging to adjust spending without dipping into your principal investment.you may need to explain this OR simplify it. i.e “you principal WHAT? Principal investment? Or what if they are not dipping into their investments and they are living off their CPP / OAS (income streams), but now how to dip into their investments? Or are you better off editing that list line to read “…”to adjust spending without dipping into your next months’  spending plan / budget / allowance.”? Open to suggestion… you will just need to clarify this.
2. Inflation Impact: Having a fixed withdrawal amount may lose purchasing power over time, potentially impacting the quality of your life in later retirement years.

3.  Missed Opportunities: If you stick too rigidly to a spending plan, that could lead to avoiding unique experiences or opportunities. Which is not fulfilling and will lead to feelings of regret or dissatisfaction while your loved ones or those around you may be enjoying those opportunities.

4.  Psychological Burden: Now let’s talk about the mental / emotional side. I know for me and it may be the case for you too… adhering to a strict spending plan can create stress, guiltabout spending in certain areas or fear of straying from your budget. The pressure to consistently monitor and adhere to a spending plan can lead to burnout or fatigue. Which is the last thing you want during retirement.

Let’s chat more about layered spending – an area that most of my clients love talking about. If you’re anything like my sweet couple – Ken & Deb whom want to enjoy their younger/more active years… this may be for you! People who are 65 still consider themselves young (for retirement)…this may be an insult.

What is Layered Spending?

Layered Spending is a more dynamic budgeting approach that accounts for changing expenses as retirees age. This method typically involves spending more in the earlier years of retirement when you are often healthier and more active, and gradually reducing your spending in later years when needs may shift (e.g., increased healthcare costs, decreased mobility). Below are some advantages of this strategy.

Advantages:

1. Flexibility: Layered Spending allows you to adjust spending based on life stages, health, and personal circumstances. This flexibility can help ensure you have sufficient funds as your needs evolve.
2. Encourages Experiential Spending: With a layered approach, you can allocate more resources toward experiences or activities that enhance the quality of your life, such as travel or hobbies, rather than just material goods.
3. Long-Term Planning: Layered Spending can encourage long-term planning about your finances given it is more dynamic in nature, this could provide opportunities to save or invest appropriately for future needs while enjoying your current retirement lifestyle.
4. Minimized Guilt: Knowing that discretionary spending is accounted for in the budget can reduce feelings of guilt associated with spending on non-essential items or experiences, promoting a healthier mindset around money.

By adopting a Layered Spending approach, retirees can strike a balance between enjoying their retirement and ensuring that they manage their financial resources wisely, leading to a more satisfying and fulfilling retirement.

Disadvantages:

1. Complexity: This method requires careful planning and regular adjustments, which can be daunting. Life circumstances can change unexpectedly, and adjusting the layers of spending might not be as straightforward as it seems. This is where an excellent CERTIFIED FINANCIAL PLANNER®  will help you.
2. Potential for Underfunding: If your plan miscalculates your needs in later years, it could mean running out of funds when they are needed most.
3. Emotional Decision-Making: Layered Spending may lead to emotional decision-making, where you prioritize spending today over your long-term financial health. This can result in impulsive spending choices that aren’t aligned with your goals.
4. Social Pressure: The desire to maintain certain layers of spending (like dining out or traveling) can create social pressures to conform to peers, potentially leading to regret or financial strain. – can you clarify? So you mean social pressure in the later years when you don’t have as much to spend and can’t dine out (as per your example in the first line)?

To mitigate these disadvantages, a layered spending approach should regularly be reviewed and adjusted with your CERTIFIED FINANCIAL PLANNER® . Keeping a close eye on the markets and cash flow amongst other factors are critical to ensure a healthy financial picture and remain flexible enough to adapt to changing circumstances.

Choosing the Right Method

When deciding between Straight-Line and Layered Spending, consider your unique circumstances, including:

• Health Status: If you are in good health and able to climb those cobblestone steps of Europe or go hiking with your grand-kids, you may prefer a layered approach to maximize your active years, while those with health concerns might choose straight-line spending for consistency.
• Lifestyle Goals: Consider how you want to spend your time and what activities are most important as this will influence your spending patterns.
• Financial Situation: Evaluate overall savings, pensions, CPP / OAS benefits, and other income sources to determine the most sustainable withdrawal strategy.

Inflation and Market Volatility: Understanding how these factors can affect retirement savings will help give you peace of mind to make informed decisions about your spending approach.

No approach is perfect, but there is a right approach for you. Whether it’s the straight-line  or layered approach, I hope this article gives you the ability to make that decision. Life is too beautiful to be stressed about finances.

Conclusion

Both Straight-Line and Layered Spending methods have their advantages and challenges. Discuss with a CERTIFIED FINANCIAL PLANNER® who cares about you and the life you want to live. Someone who will tailor their guidance to you and your needs. Regardless of the approach chosen, the key is to create a flexible financial plan that allows for a fulfilling and secure retirement.

DISCLAIMER:

The contents of this letter does not constitute an offer or solicitation for residents in any other jurisdiction where either Cody Weber and/ or Sterling Mutuals is not registered or permitted to conduct business. The opinions expressed are those of the authors and do not necessarily reflect the views or opinions of Sterling Mutuals Inc. Mutual funds provided through Sterling Mutuals Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. Mutual funds are not guaranteed, their values fluctuate frequently, and past performance may not be repeated.