How to safeguard your retirement…
Have you ever been scuba diving? With scuba diving, you need to plan your dive, how long, what depth, do you have the right gear, etc. If you make a big mistake there are no do overs, it could cost you your life. Retirement planning is similar, you only get one shot at it and the difficulty is, people will only do it once in their lifetime. Fortunately, as a planner we get to experience retirement many times over as we walk alongside our clients.
For people that are in the building phase (ages 30-55) and those that are in their final approach to retirement (ages 55-65), it is crucial to make sure that certain key elements have been looked at.
1. No Plan – Yes, I know it is an obvious one, especially coming from a financial planner. Yet you would be amazed at how many people do not have a formal plan for retirement. We see people without plans go one of two routes, the first is to spend as little as possible. This can lead to leaving a massive amount of money for the next generation and missed opportunity to enjoy retirement to its fullest. The other is to just spend and hope that your money does not run out, I don’t think I need to spell out how that ends.
2. Overspend Early – When do you typically spend the most money? Usually it is when you are not working, such as on vacation or on the weekend. Retirement is like a permanent weekend. It is easy to spend more than you would normally in a month. This is why having a budget and tracking it is important. Most people are not used to tracking their spending, this can help you stay in track.
3. Canada Pension Plan – For CPP and other pension plans, the big question is when is the ideal time to start? With any pension once you turn on the income tap you can’t stop it or change it, so you want to make sure that your choice is the right one. There is no universal answer to when is the right time, it needs to be looked at individually for each person. For CPP, a big factor is the reduction that a person takes for each month they start it prior to age 65. If you start the pension at age 60 you could be locking in a 36% reduction to your monthly benefit (prior to 2012 it was a 30% reduction).
4. Under-estimate Life Expectancy – With better health care and living standards our life expectancy has been increasing. The normal age that financial planners now use for a person’s financial plan for life expectancy is 95. Did you know that in 1921, the average 55-year-old could expect to live until age 75. Whereas in 2011, the average 55-year old’s life expectancy had increased by nine years to the age of 84*.
*Source – http://www.statcan.gc.ca/pub/82-624-x/2014001/article/14009-eng.htm
5. Retire Too Early – Everyone knows the slogan that was made popular by London Life called Freedom 55. That is a big challenge! If we assume a life expectancy of age 95, that means that a person retiring at age 55 would be retired for 40 years. If they started their working career at the age of 25 that means their working career would only be 30 years. Not too many people have the financial means to have 30 years of work pay for 40 years of retirement.
