Retirement: Are you prepared?
The Financialist • Issue 93 • April 2007
BY ALAN KOTAI CFP CIM CFA
Retirement is a major transition point in people’s lives.
It is characterized by changes in daily activity, social contact and financial position – rather than accumulating savings you will, typically, be drawing on your savings.
To increase the chances that you will enjoy a successful retirement you need to be pro-active, have a clear vision of what you want retirement to be, understand the issues and risks and, of course, have a plan.
RETIREMENT TRENDS
The nature of retirement continues to evolve as a large portion of the Canadian population (the boomers) reach retirement age. This represents a significant component of the population as Statistics Canada records demonstrate:
- Currently, more than 4 million Canadians, or one in eight, are over age 65
- By 2041, approximately 10 million will be over 65 – about 23% of the population
That is a 250% increase. The same demographic trend is also evident in the US, Western Europe, the UK, Australia and most significantly, Japan.
Canadians on average retire at age 62, with a greater number of people today working part-time or taking on a second career in retirement.
RETIREMENT VIEWPOINTS
To provide perspective on how Canadians view retirement, I will quote a 2006 survey titled the "Psychology of Retirement" conducted by Desjardins Financial Security.
Pre-retirement survey participants were asked questions about their retirement plans.
Their responses:
- Targeted retirement age: 60
- 56% of workers 40 and older plan to retire partially, compared to 39% who plan to stop working completely at retirement
- Age at which individuals began saving for retirement: 35
- 92% recognize the need for retirement planning, but only 64% have actually done anything about it
Retirees were asked what they liked best about retirement:
- 31% - Control
- 23% - Having more time for themselves
- 9% - Not having to work or deal with a boss
When retirees were asked what they liked least about retirement, they responded:
- 23% - "Nothing" because they liked being retired
- 17% - Not enough money
- 14% - Health issues or coming to terms with aging
- 11% - Loneliness
- 9% - Boredom
It is important to realize that retirement today may mean living in that stage for 25 to 35 years.
What do you think those years will be like for you?
PRE-RETIREMENT ISSUES
Here are some common examples of family and social issues you may face as you approach your retirement:
- Your children may still be living at home or be financially dependent.
- Your parents may be dependent on you and require your regular attention.
- Your sense of personal worth may be tied to your career. Work helps provide a sense of identity - who your community is, and how you connect. Those networks are disrupted at retirement.
FINANCIAL RISKS
During one’s working career - particularly in the early years – if you have a financial setback, you have a greater ability to overcome your adversity.
However, in retirement, if you experience a financial setback it is very difficult to recover as you no longer have the ability to increase your earning power and many of your expenditures are non-discretionary (e.g. rent). Here are the top 5 risks in no particular order:
1. Investment risk
Suffering a large decline in your investment portfolio just prior to, or in the early years of, retirement could result in a permanent loss of capital.
2. Inflation risk
Erosion of purchasing power due to the increasing cost of living.
3. Longevity risk
Life expectancy has doubled over the past century and people are living healthier and productive lives well into retirement.
4. Withdrawal risk
Drawing down savings too rapidly
5. Health care risk
With an aging population and increased cost of delivering medical solutions, health care costs will continue to rise.
The degree to which you are exposed to these 5 risks will vary.
PRE-RETIREMENT PLANNING
The transition from full-time work and wealth building to retirement and creating lifetime income requires a new and complex set of financial decisions.
Analyzing your financial position, establishing specific but flexible financial and retirement objectives, and then putting in place a plan of action for achieving those objectives, will help you increase the chances of enjoying a successful retirement.
Here are the basic elements of a retirement plan:
Step 1:
Expense projection – this step involves taking your financial objectives and putting numbers beside them. First, take an inventory of your primary expenses (things you absolutely need to spend money on). Then, create a list of those secondary expenses (or objectives) that are not essential but would enhance your happiness – such as travel, hobbies and gifting.
Step 2:
Income projection – identify all sources of income that are fixed entitlements. Match the "fixed" income component with your primary expenses and determine if a gap exists. If so, determine what amount of your savings will be necessary to generate an income and fill the gap. The remainder of your savings could be for contingencies and secondary expenses.
Step 3:
Establish income and savings strategies to increase the certainty of achieving your objectives. These are numerous and beyond the scope of this article.
Step 4:
Consolidate and simplify your financial affairs. This is an important step to ensure that your retirement plan is cohesive and integrated.
Step 5:
Monitor regularly and meet with your financial advisor periodically. We suggest annual reviews.
Planning for retirement transcends the pure financial aspects, and also includes the realm of health, family and psychological factors.
- Focus on health and understand the aging process.
- Prepare yourself psychologically by taking on hobbies or other interests.
- Family assistance – be realistic about your abilities to assist your children or family members in their endeavors.
- Finally, if you play the role of the "trusted family" member, ensure that your aging parents' financial affairs are in order, that their plans are clear and well documented.