Got the Retirement Planning Blues?
29 November 2022 2
29 November 2022 2

Enriched Academy Staff

It’s a fact; retirement planning is an overwhelming task that is all too easy to kick down the road! There are so many “ifs” in the planning process it’s hard to know where to start, and just getting by for the near term may be taking up all of your time… and most of your money! However, the result of procrastination when it comes to retirement planning is also a fact —getting started too late will severely restrict your retirement lifestyle and is the number one regret for retirees.

To that end, we have assembled a list of quick tips and busted a few myths to help get you going on the essentials and highlight some additional factors you should be considering.

There is no magic amount for a savings target or a simple rule of thumb to base your retirement plan. There is no shortage of variables to consider when trying to figure out how you are going to fund your retirement dreams: How long will I live? Will my health or my spouse’s health fail? How much will my current assets and investments grow in value? How will inflation impact the next 5,10 or 20 years? There is also no magic number — often quoted numbers like $1,000,000 or formulas like six times your annual salary at age 50 have no basis in fact, especially not your facts.

The truth is there is only YOUR number, which results from making a plan based on the kind of retirement life you envision, carefully calculating how much it might cost, and creating a saving and investing roadmap to fund it. If you must have some kind of number for reference, 2019 Federal Government data showed the average annual spend for a household over 65 (including taxes) was $64,461.

CPP, OAS and other government programs will get me through. The maximum amount of CPP you can currently receive is $1254, but the average CPP payment at age 65 is only around $750. OAS will add another $685. You need to pay the maximum yearly CPP contribution for 39 years in order to max out your benefit! Both CPP and OAS are indexed for inflation but that is a pretty tight budget by any standard and you will definitely need to supplement these benefits with some retirement savings of your own. You can get an estimate of your CPP and OAS payments HERE.

If you don’t yet have a TFSA and/or a RRSP, waiting is costing you a lot more than you think! Maxing out your TFSA every year from age 25 to 65 with an index fund returning 5% (TSX 15-year average) would yield $725,000. Starting at age 40 would leave you with only $287,000. You could try and compensate by taking on riskier investments with higher returns, but your downside risk would also be higher.

Saving as much as possible is the only retirement plan I need. This might work if you are super disciplined, but it does leave a lot to fatalism! Having a written plan will help you track progress and let you know when it’s time to make adjustments. Putting the savings away is only half the battle, you also need a plan to invest and track the growth of your nest egg as well as one for how much money you will need post-retirement.

A financial advisor is the golden ticket. A financial advisor can offer information and advice, but they don’t do miracles. They may also play a limited role (e.g. investing) and their market returns may not be any better than what you could get with a lower cost DIY solution like a robo-advisor or all-in-one ETF. A financial coach or financial planner offers more comprehensive planning and are good choice if you don’t have time or motivation to dig into retirement planning on your own.

The value in my home is going to make up for my lack of saving. It might if house prices remain elevated, but how will you get cash for day-to-day out of your home? You could sell it and rent or downsize, rent a part of it (or do short-term rentals like Airbnb), or get a reverse mortgage. There are options but each one has limitations, so do your homework before you retire and see which one might work for you. For example, there may be no market for Airbnb in your area. A reverse mortgage may make financial sense if you absolutely need to stay in your home, but they are currently running over 8% interest and you can only borrow to 55% of value.

I will spend a lot less after I retire. Another maybe! Some of your big-ticket expenses should be gone (mortgage, kid’s college) but your day-to-day will depend a lot on where you live and how you plan on keeping yourself busy. Your home may be paid for, but it could need major repairs down the road and property taxes go up continuously.

As for entertainment, are you content with the length of the Canadian golf season in your area, or do you hope to spend a couple of the winter months polishing your game down in Arizona? If you have retirement dreams, the first step is to sit down and make a best guess budget at how much they are going to cost and where that money is going to come from every month.

If you are planning to rely on a side hustle, spouse and/or inheritance for some extra cash to get you through retirement, just be aware that those options can be easily derailed. If your spouse dies, your survivor’s pension could be considerably lower. Side hustles are great, but your health may fail or maybe you can’t find something – only 10 to 20% of retirees report doing some sort of work. As for inheritance, your parents may live to be a 100, they may make some bad investments, or they may even get remarried.

I will be free as a bird and can move somewhere cheap. If you currently live in Vancouver or Toronto, you have options. If you currently live in rural Saskatchewan, your choices are definitely more limited! Moving from one place to another within Canada may yield savings, but it may also put you far away from familiar people and places that will keep you happy and content during retirement.

Moving to a “cheaper” country overseas sounds exotic, but it’s a huge commitment if you are thinking permanently, and you have to consider health and safety issues, cultural differences, and the fact you may simply get tired of it! You may need to (medical reasons?) or want to (homesick?) come back at some point. Despite the cold, we think Canada is a great place to be!

High interest rates will let me live safe and secure on the interest and keep my capital intact… I’m set! If you are nearing retirement age and looking for safe and secure investments, being able to buy a GIC at over 5% is a nice option that we haven’t had for a long time. However, there is no guarantee that we are entering a long-term high interest rate period. A quick look at this graph shows the BOC overnight rates was under 2% for 13 years from 2009 until earlier this year! With the average retirement now stretching 20 to 25 years, economic conditions are likely to change, and you need to plan accordingly.

The factors affecting your retirement planning are constantly changing — savings rate, inflation, investment performance, interest rates, real estate values, retirement age, job loss or illness, etc. Some degree of uncertainty will always be there but knowing your options and laying down a roadmap to get you started and stay on track will help alleviate a lot of that uncertainty.

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Ellison Williams
May 16, 2024 12:16:37

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