The retirement landscape has rapidly changed in the last 10 to 15 years. No longer do you work 40 years, retire at age 65, and die at age 75. For one thing, life spans have lengthened considerably. For another, people are working longer. It’s no longer “freedom 55,” but rather “freedom 75.” This brings new financial challenges, primarily the question of how we plan so that we don’t outlive our money. I have six simple steps to enhance your chances for financial independence – for as long as you live – while avoiding the most common pitfalls.
Parents of people in my generation or slightly older worked the standard 40 years, retired at 65 with the standard gold watch, and passed away at a fairly common 7 to 10 years after retirement in most cases.
In the ’80s and ’90s, however, many pre-retirees began looking to escape the grind that much sooner – at age 55 to 60. But this coincided with the happy phenomenon of an average 10-year increase in life spans.
Outliving your money
For most middle class people, this created the dual problem of a younger target retirement age (implying less time to save for that retirement during peak income-earning years) plus a longer life span (implying the need for more assets to sustain their lifestyle into retirement). For about a decade, this worked for some people. But a decade of poor investment returns during 2000-10 caused may people to reassess whether their early-retirement plan was feasible when stretched over an additional 20-plus years. People were forced to cut back on lifestyle expectations or return to work either part time or full time for a few years to meet the shortfall.
Where does that put today’s pre-retirees (the Baby Boomers)? Forced retirement at age 65 is over, and employers are finding that this group has a lot of knowledge and has a strong work ethic. The 70-year-olds today are generally in better shape than previous generations owing to healthier lifestyles and more exercise, which allows them to work further into retirement or travel longer.
Carrying debt into retirement
Debt is another factor that has kept or will keep some seniors working well past 65. My parents’ generation almost always retired with the family home paid off and zero debt. This has changed as seniors bought million-dollar dream homes and recreational properties. So it’s not uncommon today for couples to retire and still have $200,000-$300,000 of debt that they are carrying into retirement. Low interest rates have also helped to fuel this unhealthy practice. However, interest rates change, and they won’t stay low forever. Having debt means you lose some control over your future. Retirees need cost/expense certainty, because your income is fixed and certain.
My six tips for a better retirement
As Baby Boomers approach retirement you can take steps to ensure you are working only because you want to. That is financial independence. My simple steps towards financial independence and avoid common pitfalls are:
1. Pay off debt. Reduce, or better yet eliminate, debt as you move to retirement. Debt is an extra weight you just don’t need as you age.
2. Don’t buy a huge monster home. As an older retired couple, you don’t need more house, you need less. Get a nice rancher or bungalow (no steps) or a townhouse or condo that needs little maintenance, and makes it easier for you to travel at a moment’s notice.
3. Build up assets. This means RRSPs, pension plans, TFSA and non-registered assets as you approach retirement so you can chose when to stop “the grind.” Sometimes our employer decides the matter for us, so be prepared for anything that comes your way. Having different pools of assets will give your more choices into retirement, and is more tax efficient as well.
4. Don’t lend money to adult children. If you do, make sure it’s a legal loan that pays interest. In my experience, though, adult children rarely repay loans to parents. So if you decide to make an outright gift to one adult child while you’re alive, you should account for the gift in your will. For example, you would instruct an amount equal to the gift given to one child while you were alive would be deducted from the proceeds of your estate.
5. Make a budget. Don’t spend more than you earn. That inevitably leads to debt and that will reduce your future lifestyle.
6. Don’t count on inheritances. Given current longevity of both Baby Boomers and their parents, inheritances could come when you are very old or not at all if long-term care for your parents depletes most of their remaining nest egg. Look after your own nest egg first, and if you get a bequest, consider it a gift. Don’t include it in your retirement plans.