We find that many people have an idea of retirement that often leads to surprises when they begin this long-awaited transition.
These expectations can be a result of listening to too many outside inputs (e.g.: media, friends, family, and salespeople). This ultimately can lead to massive confusion and could stop your progress dead in its tracks.
Once you recognize the following 9 Retirement Lies and discover the actual truth, your financial capabilities and confidence will soar!
Please click on the following points or scroll down to read further.
- Lie #1: Retirement planning is just for older people
- Lie #2: I’ll never be able to save enough for retirement.
- Lie #3: I need $500K, $1M, $2M, etc. to retire.
- Lie #4: Never touch your capital.
- Lie #5: You need 70-85 % of your current income level in retirement.
- Lie #6: You need that initial level of retirement income, indexed for the rest of your life.
- Lie #7: You’ll have enough money to last through retirement as long as the average rate of return matches your plan.
- Lie #8: The government will take care of medical expenses.
- Lie #9: “I can deal with a shortfall in retirement savings by working longer or taking up some part-time work.”
Lie #1: Retirement planning is just for older people.
The definition of retirement is changing and even though it may seem like a long way off, use that to your advantage. Much like dieting and exercising, the tough part is starting a plan and sticking to it.
Here are some things to help you begin your planning:
Every little bit of savings helps and will make it easier.
Start early enough. You will have more time to accumulate savings and growth.
Harness the power of compound interest. Planning and saving a little now on a regular basis can let money work for you.
Your money will seem to grow slowly at first and then starts to balloon as you get older, even if you haven’t changed your regular investment amount.
Every year you delay means you’ll need to save more money and perhaps take on more investment risk in order to reach your goals.
Always remember that the concept of “retirement” was invented in 1881, in the heat of the Industrial Age. This is because people eventuality became so broken from the brutal working conditions of the time. We are now able to build futures brighter than our pasts. Replace the idea of “retirement” with “financial independence” and the planning experience could become a real joy, regardless of your age.
Lie #2: I'll never be able to save enough for retirement.
It’s surprising, even shocking, that with much of the attention devoted to an aging society and the need to save for retirement, that so few people are inspired to get started. Many do have a doom and gloom attitude about retirement. Retirement lies aren’t helping matters.
“I’ll never be able to save enough for retirement.” That may seem true when you’re young, starting a family, paying off those school debts, and dealing with a mortgage. Instead, you figure your income will go up in the future and you’ll work on developing your money management skills and habits then.
Don’t fall into the trap of thinking it’ll be easier to save for retirement in just a few more years. After all, there are competing and expensive needs no matter how old you are.
First, you pay off your college debt and the next thing you know, you’re helping your kids pay off theirs. Then there is the house, wedding expenses, home renovations, grandkids and the list goes on and on. One day you’ll stop and ask yourself, ‘Where did the time go?’
Every year you delay starting to save ultimately means you’ll need to save more in order to get on track for a retirement that’s getting closer and closer.
The best time to start saving for retirement is when you are young and just starting to work. But if things just didn’t work out that way for you, then consider starting now. Let the power of compound interest work for you as long as possible. Click the button below to use our “Savings Growth Calculator.” Play around with the variables, create different scenarios, and work with numbers that are within your capability.
Keep in mind that there are only a few variables you can control:
How much you can start saving today, and going forward.
The age at which you decide to retire.
How much income you are going to need in retirement.
Your investment mix. You do have control over this to some degree. The market does dictate much of this, however, you do have the choice between allocation. Important note: if you want to get a better return, there is always a greater risk. This is a complicated decision that involves many factors.
Lie #3: I need $500K, $1M, $2M, etc. to retire.
The fact is that your “number” can vary greatly depending on your personal situation and goals, how long you expect to live, whether you will be single or with a spouse/partner, and when you will retire.
Also, don’t forget government benefits like Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security. If you want to maintain the same lifestyle before and after retirement, your number is tied to how much income you will need to provide the same consumption dollars. That’s the money you normally spend on your own lifestyle. Add some extras to that bucket list of yours for those early years of retirement when you will be most active and spend more money.
You don’t need whatever number people are telling you – you need a plan!
If you don’t know where to begin, consider asking an advisor who specializes in retirement income planning.
Lie #4: Never touch your capital.
Conventional thinking tells you to keep your assets intact. That may work for the wealthy, whose investments generate plenty of cash and have surpluses to last for subsequent generations.
For many, there may be a need to dip into your capital as a way of providing lifetime income. While saving may be a goal in itself during your working years, you need a plan for conservatively spending what you have saved during retirement.
Wait, spending what you saved? Isn’t that what you planned? It really is okay to spend your capital.
The idea for many is to spend down in retirement. That’s why you save. It is important to have a plan so that you have enough capital to provide you with the cash flow you need no matter what happens; no matter how long you live. It is also important to know how much you can spend and what the impacts of spending more have on the longevity of your lifestyle.
We have included our RRIF payment calculator below. This is a useful tool to understand how different levels of spending will influence the longevity of your money.
Lie #5: You need 70-85 % of your current income level in retirement.
A growing number of analysts and researchers on retirement income and spending patterns have found that most people will be fine if they target 50% of their pre-retirement earnings. Statistics Canada has many years of supporting data on this.
You see, the focus should be on consumption dollars, what you spend on yourselves, and your own lifestyle. For most Canadians, that excludes mortgages, child-rearing costs, and saving for retirement – things you wouldn’t necessarily be spending money on during retirement. You will need 100% of your consumption dollars and some extra money in the early, active years of retirement for those special trips and experiences you have dreamt about for years. Your actual replacement income goal will depend on your marital status, whether you own a home, whether you have children, and how much money you earn, so the range can go from 40 to 60 percent.
A good rule of thumb is to not buy into a rule of thumb! You are not an average person. You’ve got unique goals and needs. You deserve your own plan!
Working with an advisor trained in the unique field of retirement income planning can prove greatly beneficial to work out what you need and what you want to do throughout the various phases of your retirement.
Lie #6: You need that initial level of retirement income, indexed for the rest of your life.
Retirement isn’t one long vacation. It isn’t one period in your life. It represents the longest set of phases in your life. Each phase will have different needs for cash flow.
You may need more money in your early, active years.
You then might settle down to a more normal retirement where expenses drop. Then late in life, poor health, the loss of your spouse or partner, losing your driving license, and other changes will cause you to spend even less money.
Yes, you may require money for long term care needs, but hopefully, you planned for that before your retirement so that those needs aren’t coming out of your regular cash flow late in life. The amount of money you’ll need and the most efficient means of getting it are important points you should review yearly.
Here’s what you need to do:
Set up an investment and income stream that is flexible and adaptable to changing circumstances.
Stress test the plans, strategies, and components to make sure they continue to do the job they were designed to do.
Life changes and your needs for income will change with them.
Lie #7: You’ll have enough money to last through retirement as long as the average rate of return matches your plan.
Averages can be very misleading when applied to rates of return during spending periods. The pattern of returns can dramatically impact the size of your assets when you are withdrawing money to provide yourself an income to meet expenses.
Whenever you withdraw money and the markets are down, or when you take out more than what your investment is earning, you eat into your retirement nest egg. These losses can be difficult to recover from. You must make up for the lower rate of return in a given year. You also must factor in the money you spent that is no longer invested. Negative rates of return in the early years of spending can be devastating on how much money you will have left 10, 15 or 20 years down the road, even if the long-term average rate of return matches your plan. It’s not just about average rates of return; it’s about the sequence of returns that make up the average.
Starting with a low or negative return has the potential to permanently upset your plans. What can you do about this? There are many planning approaches that answer this question but here is one key strategy:
Set up a base level of retirement income in your plan that you cannot outlive and that will provide for the essentials that you need to live a comfortable lifestyle.
There are multiple strategies to help you achieve this and we would be happy to discuss them with you.
Lie #8: The government will take care of medical expenses.
Our rapidly aging society is backing governments into a corner, forcing our leaders to make tough decisions on health care. Absolute costs of health care are going up while services are being cut back. Compounding this problem is the fact that we demand the latest and greatest health care innovations. Get used to it. You are going to have to channel more income into paying for uncovered services or eat into your long-term savings to take care of yourself and your aging family.
Our society is moving quickly from child care issues to eldercare issues. The latter issue is much more expensive and long-lasting. The trend now is pushing health care out into the community. That sounds good and has some merits. However, long-term care is not free. Much of it is provided by the family. It’s voluntary. It means sacrifices of energy, time out of the workforce, and hits to the retirement savings plans of caregivers. The government is not picking up the tab.
So what can we do about this?
Assume that these costs will continue to increase and build that assumption into your retirement cash flow plan.
Lie #9: "I can deal with a shortfall in retirement savings by working longer or taking up some part-time work."
Recent studies have found that almost half of retirees left the workforce earlier than planned. Downsizing, layoffs and negative working conditions were some of the reasons. People ages 55 plus average more than 13 months on unemployment (Source: Associated Press, AARP Public Policy Institute 2012).
The biggest reasons for leaving the workforce early were health-related – either the workers or someone in the family. Working longer is not an option you can definitely count on because staying on the job or getting another job is not a given. Almost two-thirds of retired Canadians had less than a year to plan and adjust for what could be 30-40 years of retirement.
(Source: LIMRA Retirement Study, 2012; Retirement Myths and Realities Poll, 2013)
The Bottom Line
Be proactive when planning your retirement and remember the earlier you start, the better! Healthy retirement planning will help ensure a more successful retirement.
If you are already retired, there are still many things you can do: refine your cash flow and spending, or leverage existing hobbies and skills.
If you need any help getting started, please book a conversation with us.