Retirement: Different Strokes for Different Folks
Back in 1883 when Chancellor Otto Von Bismarck of Germany introduced the concept of retirement at the magical age of 65, hardly anyone lived to collect. The world’s changed a lot since then. According to Statistics Canada, 82.5 years for women and 77.7 years for men. Increased life expectance is one reason retirement planning is such a Big Idea. In 2006, 1,167,310 people were aged 80 years and over, up 25% from 2001.
The struggle to balance building retirement assets for tomorrow against today’s very real demands for cash means that often the Big Idea is pushed to the side. Ooops. There goes the Big Idea, hidden behind “not enough money”, “paying down the mortgage” and “coughing up for university.”
It’s human nature to find overwhelming reasons not to change course. So starting something new, putting the Big Idea into action, takes more effort than not. Curiously, the effort is smallest when the need is furthest away.
A young person starting out can sing the popular tune, “I’ve got no money.” And it’s true. With lower incomes, student debt to pay off and retirement thirty-five or forty years away, who needs the extra pressure? The thing is the pressure never lets up, and recognizing that fact early on can mean establishing a strategy that seeks to create a balance between the present and the future.
Implementing the Big Idea when you’re young has significant benefits. First, spring chickens can set aside a significantly smaller percentage of their income to grow their retirement nest-egg. More importantly, perhaps, with a long, long, long term investment horizon, there are far more investment options available that will do the trick. Want to compensate for a small monthly contribution? Look for an investment that produces a higher-than-average rate of return. Worried that your conservative approach to investing might be limiting your growth? Don’t be. With so much time on your side, conservatism isn’t a dirty word. You can afford to make like the tortoise.
Resist the urge to dip in as you move along life’s path. Going back to school, time spent between jobs and mounting debt can all be tempting reasons to cash in retirement funds. How to overcome temptation? Have a plan.
Plan and stick to a budget that includes an emergency-only cash account, vacation savings account, and the like.
Make sure you’re covered by the right kind of insurance so your retirement assets don’t become your emergency fund.
Establish an automatic investment program.
Plan for big expenses: returning to school, a down-payment on a home, that new car.
It’s one of life’s big jokes that as we earn more money we seem to have less money at our disposal. Like a gas expanding to fill a container, our expenses grow in proportion to our increased incomes. We want to have a family. We need a bigger house. It’s time to trade the compact for a mini-van. But wait! What if you got a raise and the first thing you did was set aside a portion of that raise for the future? Before the Devil Expenses could get their hands on your money, you whisked it away into an investment program.
Here are some tips to stay on track with your plan:
Ignore the “all or nothing” message. You do not have to forgo a life in order to implement the Big Idea. The idea is to balance today’s needs with tomorrows.
Don’t make your plan so grand that you end up defeating yourself with unrealistic expectations. Start small, grow your investments over time, keep your perspective.
Pay off your consumer debt. Every dollar you pay in interest is a dollar lost to your investment portfolio.
Watching the kids go off to university or college can be frightening for parents. Empty Nest Syndrome is a well-documented stress. So, too, is the realization that you may be running out of time. You’ve got to get the mortgage paid off, buy a new car, eliminate that credit card debt, get the kids through university, all while putting together that retirement portfolio you’ve deferred for so many years.
Relax. The nice thing about retirement is you have control over when you do it. The institutionalization of age 65 as the retirement age is simply a holdover of Otto’s idea. Since then we’ve moved many of the sign-posts of life further along the road — we have children later, go to school longer, and live healthily for many more years. So we can also move forward the signpost for retirement to 70, 75, or even later. Escape the mindset that says retirement at 65 is “normal” and you can not only build more accomplishment into your life, you can further feather your nest. Extending your working life also extends your investment horizon, allowing you to maintain your investment strategy.
Things to watch for:
You’re prime filling for the sandwich between your kids’ educational needs and the help your parents may need. Consider the impact of elder-care on your investment portfolio and take the steps to mitigate that impact.
Consider government pensions to be the gravy in your retirement income. While younger Canadians have already come to terms with the fact that they will be responsible for themselves, those of us who have grown up with the security offered to our parents may be less willing to emotionally forgo our “rights.”
Hold your assets wisely: keep your interest-bearing investments inside your RRSP and hold your equities outside to take full advantage of the beneficial tax treatment on capital gains.
June 12th, 2008 at 9:24 am
Since mandatory retirement has been lifted, I am considering working till I am 69. I bought my house in 2002, due to retire in 2015. The lifting of mandatory retirement has opened up a whole new world of opportunity! Instead of a 7 year retirement date, I now have an 11-year retirement date and suddenly the future looks brighter! I can save more for my grandchildren’s RESP’s, fix up my former rental house before I retire, increase my pension plan and possibly take a couple of trips! Also, that magical rollback makes me feel much younger again as retirement is looming over me!
June 12th, 2008 at 2:05 pm
Gail; I undersatnd the magic of compound interest is inyour favour most when you are young.
My question is, when do I stop being “young”?
I have been putting away bits and pieces into RRSPs since my early 20’s. And I FORCED my husband to start putting $200 month away since we had babies 10 years ago.
Suddenly I came to the realization that I am in my mid 30s!!!! I have always had the comfort that I was young to save, but now I feel a minor panic. Is 10% of your income still the accepted amount in this day of low returns???
I feel the pressure is on to save for my golden years. Women in my family tend to live to be ANCIENT (in their 90s)!!! And what if my hubby beats the odds and lives to be old too?
June 12th, 2008 at 3:50 pm
Tracey — personally I think you’re doing great if you’re saving 10% and have no consumer debt and presumably a mortgage and other demands on your income (BABY!). You have 30+ years before retirement at 65, you’re young and besides you’re not just starting.
Personally, if my wife and I can get out of our 30s with having two kids (one in existence now, one planned) with our crushing Toronto mortgage and no debt I’ll be quite pleased, even if it means we don’t max out our rrsp contributions.
June 12th, 2008 at 5:07 pm
Wanda, sounds like you have a great plan!
I’m only in my early 30’s. I have ways to go from retirement, but I really can’t picture myself retiring early. I really enjoy working. (I know - give it time! lol!).
Tracy: Sounds like you are on the right track! Good job!
I also have a lot of longevity in my family ( Thankfully) and it’s certinaly something we need to consider. If we are blessed with long & healthy lives, we need to be able to support ourselves.
Geoff: I’d love to be able to max-out my RRSp contributions, but I really don’t think it’s realistic for most people. Sounds like you’re on the right track too. Focusing on no debt is a big goal.
June 12th, 2008 at 5:23 pm
Wanda, I’ve talked about the tools at Fiscal Agents before, and you should check them out. go to fiscalagents.com, click on tools and use the Retirement Savings and Income Calculator. good luck. g
June 13th, 2008 at 6:43 am
Holy! I need to be depositing almost $50K into an RRSP each year according to the calculations I entered (modest returns of 4%, retiring in 29 yrs, living til I’m 90 on $40,000 a year)! And I thought I was doing well with $300 a month. Well, hopefully I can continue to be aggressive with debt repayments and have nothing left except a vehicle loan at $300 a month and our mortgage, so then I can bump up the RRSP contributions.
Gail, why is it that whenever I’ve gone through any of the RRSP tools they all make it sound like it’s going to be an unattainable goal? I mean, who has 2 children, contributes to RRSPs and RESPs and has some debt they’re trying to pay down also has $40K a year floating around?? I’m putting my head back in my shell so I can continue the ’slow-and-steady’ until I get my $40K windfall.
June 13th, 2008 at 9:10 am
Michelle, I had the same freakout. But usually these calculators are based on replacing 75% of your income, which for most people is excessive. A better way is to calculate how much income you need right now, once you remember to factor in that you won’t be paying for a mortgage anymore (assuming its paid off), no need to save for RESP, no need to make any more contributions to RRSP, and no kids to pay for. Try calculating at 50% of your current income to see what you need. But be sure to know yourself - if you really enjoy travelling, you’lll likely want to do more when you’re retired, etc which means more $. However, you may also downsize your home and buy a condo… lots can happen in 30 years. Sounds to me you have a good plan.
June 13th, 2008 at 9:10 am
Michelle - your 4% return assumption is unduly conservative. If your investments are well diversified you can reasonably and conservatively assume a 6% return. Check out the “financial facelift” column in each Saturday’s Globe & Mail.
June 13th, 2008 at 10:10 am
Michelle, relax. first, you’re assuming you’re providing your full pension from your RRSP. That won’t necessarily be so. If you’re entitled to the max in government pensions, then you’ll only have to come up with $24,000 (in today’s dollars) from your savings since gvt pensions would give you about $16K (in today’s dollars). Second, you should be able to do better than 4% over the long term. And third, you’re assuming you have no other assets to liquidate. It’s important that you don’t panic and stop saving. Who knows what the future holds. It’s important that you do WHATEVER YOU CAN to provide for the future. But the present is equally important. So make sure you’re also having some fun!
g
June 13th, 2008 at 10:37 am
Thanks all for the panic reducing advice. By the time we retire we’ll have a nice property to add as part of our portfolio. We’re not travellers, but I’m sure we’ll find some way to fill our time. I plugged in the 4% because I was trying to be ultra-conservative, but yes, I am hoping for better returns than that when all is averaged out. And after the debt is paid I do intend to increase my RRSP payments, but I also intend to enjoy living on extra cash for a bit too…maybe a pool as our home retreat, paid for with cash of course!
June 13th, 2008 at 12:20 pm
Thank you Gail! This site looks excellent and I will work on it this weekend. I do have to admit that I am seeing a Certified Financial Planner on Monday. I chose this person based on her several credentials, the fact that she is older and may relate to me more than say a young CFP (please forgive my bias as I am sure young CFP’s are excellent). I am looking for a fee based CFP, but I can’t tell if this person works on a fee or commissions. I don’t want to be tied to buying investments right now but am really looking for a road map. One question to her will be ‘Can I achieve the things I want to achieve within the timeframe that I have left to work?’ It isn’t that I don’t work long and hard but ‘How can I work smart?’ I have worked with enought ‘experts’ in many fields to know that I need to tread slowly with this person before I make any commitments.