One of the strangest things about retirement is that it’s often not about whether you have enough money to last a lifetime, but whether you feel comfortable spending it.
Economists call this the pension consumption puzzle.
In theory, retirees should withdraw their savings over time and enjoy the money they’ve accumulated over decades. In real life, many don’t. They underspend, sometimes dramatically, even when the plan clearly shows they can afford to spend more.
David Blanchett’s research helps explain why. Blanchett is one of the most respected retirement researchers in North America and has spent years studying how retirees actually behave once the paychecks stop. Although much of his research takes place in the US, the behavioral lessons apply just as clearly to Canadian retirees dealing with CPP, OAS and investment portfolios.
What he has discovered is that retirees with higher guaranteed incomes are more likely to do so spend more retire than those with similar wealth who rely primarily on investment accounts. Not because they are richer, but because the income seems disposable in a way that savings often are not.
In fact, Blanchett’s research shows that retirees are roughly twice as likely to spend money shown as guaranteed income, such as a pension or government benefits, than they are to take the equivalent amount from their own savings.
Related: Why we stopped saving so much and started living
That fits perfectly with what I see in practice.
After thirty or forty years of saving, investing and being told not to touch your capital, switching to spending mode can feel strange after a lifetime of doing the opposite.
Even if the math works, seeing a portfolio decline in retirement could trigger the same anxiety you’ve spent your entire working life trying to avoid.
This is why many retirees struggle with the strategies that would actually help them spend money with more confidence.
Delaying CPP and OAS is a good example. On paper, it’s one of the strongest longevity tools Canadians have. Higher lifetime income, protection against inflation and no market risk. But emotionally it often feels like you have to give something up today, even if it improves safety in the long term.
Annuities tend to cause the same reaction. Despite their reputation, using a guaranteed income to cover basic expenses can dramatically reduce stress later in life. When lights, groceries and property taxes are covered by predictable income, the investment portfolio no longer has to do all the heavy lifting. But handing over a lump sum is difficult, even if the trade-off makes sense.
Instead, many retirees sit in large portfolios and hesitate. They have the money, but not the confidence to use it.
Especially for retirees without a pension, who are almost completely dependent on investments, behavior is more important than optimization here. A practical tool I often recommend is maintaining a modest cash wedge, usually for one to two years of planned withdrawals.
Yes, cash is not optimal from a pure return perspective. It slows down long-term growth and markets rise more than they fall. Any spreadsheet will tell you that staying fully invested should yield profits over time.
Related: VEQT and relax
But retirement isn’t lived in a spreadsheet.
That cash cushion means withdrawals can continue during market downturns without panic selling. It reduces the urge to check portfolios daily and helps retirees avoid being trapped in the headlines. Most importantly, it supports healthier spending because the money spent feels safe and available.
The goal of retirement is not to create the most mathematically efficient plan possible; it is to create a plan that is actually used.
Guaranteed income, deferred government benefits, partial annuity later in retirement, or even a slightly inefficient cash reserve all serve the same purpose. They take away some of the hesitation that often arises once shooting begins.
This Week Summary of the month:
It’s been a while since my last Weekend Reading.
Instead, I wrote about investment returns for 2025 – another banner year for global equities.
I have shared some ready-made RRSP ideas for retirement.
I explained why ETFs are no longer synonymous with low-cost index funds in the age of investment sluggishness.
And by far my most popular post of the year: This is a retirement plan. I’ll aim to release more of these so you can see how different scenarios play out.
Promo of the week:
Wealthsimple offers a cash match up to 3% when you transfer an account worth at least $25,000 from another institution.
I’ve been pretty consistent about that. If you’re investing on your own, Wealthsimple is hard to beat, especially if you’re comfortable using a low-cost asset allocation ETF as a simple one-fund solution for all your accounts.
And listen, if you’re still paying about 2% in bank mutual fund fees, switching to an equivalent asset allocation ETF can reduce your costs to about 0.20%. That’s no small improvement. It is a permanent condition that increases over time.
And if you’ve been sitting on the sidelines waiting for the right promotion, ideally one that pays cash instead of handing you an iPhone, this latest offer is about as good a reason as any to finally make the move.
Here is the simple version of the offer:
- New customers open a new Wealthsimple account (here, use my referral link and get an extra $25).
- New and existing customers: Sign up for the Unreal Deal promotion for March 31.
- Transfer $25,000 or more from another financial institution.
- Choose your competition:
– 1% paid over 1 year
– 2% paid over 3 years
– 3% paid over 5 years - The bonus is deposited into your Wealthsimple checking account monthly.
It’s basically the grown-up version of the marshmallow test. Take a smaller payout sooner, or practice a little delayed gratification for the bigger one. I know which way I would lean.
Most common account types are eligible, including RRSPs, TFSAs, LIRAs, RRIFs, FHSAs, RESPs, non-registered accounts, and even corporate accounts. Cash deposits do not count. Account transfers do.
One important detail that is easily overlooked:
During the bonus period, you can withdraw money with Wealthsimple up to 20% of what you transferred without reducing your bonus payments. If you withdraw more, future payments will be reduced proportionately. There are no fines or chargebacks, only smaller payments in the future.
That’s important information, especially for RRIF and LIF holders. You can still withdraw money regularly within reason.
Weekend reading:
Markus Muhs updated his investment return quilt – I like the way he puts this together with the actual mutual funds and in Canadian dollars. Well done!
Jamie Golombek wrote a love letter to those who don’t believe in RRSPs. Yes, RRSPs beat non-registered investments when it comes to tax-efficient investments.
Are you sure you want dividends? Anita Bruinsma looks on the pros and cons of dividend investing.
Shareholder loans are often misunderstood by business owners. Jason Heath explains why it is important to consider the tax implications.
Private funds are holding back cash withdrawals, which is putting investors off take their money out to maintain the fund.
In this episode of The Wealthy Barber podcast, Dave talks to Shannon Lee Simmons about what real-world financial planning looks like for everyday Canadians:
Tim Cesnick explains why Many estate plans fail before the will is ever drafted.
A Wealth of Common Sense blogger Ben Carlson asks: Would you like that too? stop working when you become financially independent?
Finally: why do it used cars feel shockingly expensive – is this the new normal?
Have a nice weekend, everyone!
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