By Robb Engen, Boomer & Echo
Last summer I thought I’d be financially free by 40. Reality – and unplanned expenses – set in this year and I’ve adjusted that ambitious projection by five years. I’m still on track to reach a net worth of $1 million by the time I turn 41, but financial independence will have to wait a few more years. Here’s why:
Remember, financial independence doesn’t necessarily mean retirement. It simply means the date your income from investments exceeds your day-to-day expenses so that you no longer have to rely on regular employment to meet your needs.
My initial projection was indeed ambitious – with us having a paid-off mortgage by 2020 and increasing the income withdrawn from our business by 100 percent (from $3,000 per month to $6,000).
But borrowing $35,000 to develop our basement this year meant we couldn’t continue our aggressive mortgage pay-down, and a four-year car loan has cut into our ability to save as much as we wanted.
That’s okay – on paper the original plan didn’t factor in these expenses, plus I hadn’t fleshed out exactly how I’d make those numbers work. Now I have a better idea, but unfortunately it’ll cost us five years. Here’s our financial freedom 45 plan:
Financial independence at 45
In late 2016, once we pay off the HELOC and car loan, we’ll have $27,000 per year to save toward our ‘findependence’ goal. With that amount, we’ll put $12,000 into my RRSP and $10,000 into our TFSAs, plus throw an extra $5,000 payment toward our mortgage.
That pushes our mortgage freedom date back to January 1, 2025. At that time, our home should be worth $600,000 (using a conservative 3 percent annual growth rate), my RRSP should be worth $380,000, tax-free savings accounts should total in excess of $150,000, and the commuted value of my defined benefit pension will be roughly $310,000.
The key to paying our monthly expenses after financial independence will come from our business income. We currently withdraw $3,000 per month from our small business, which includes income earned from three websites, freelance writing, and from my fee-only financial planning business.
My original plan showed business income increasing to $6,000 per month in five years, but without any clear path to explain how to double revenue. And, after losing my main freelancing gig at the Toronto Star, this goal seemed unrealistic.
But the fee-only planning service has gone better than anticipated – earning $10,000 in less than one year and expected to grow to $18,000 in year two as existing clients stay on and I continue to add one or two clients per month.
After completing the CFP certification in two years I’ll have the opportunity to ramp-up my efforts and potentially offer fee-only planning services full-time. At that point, between existing and new clients, the service could bring in roughly $36,000 per year.
My three blogs collectively earn about the same – $36,000 per year – after expenses and so if I can maintain or increase that income then I’ll be able to meet my $6,000 per month goal for business income.
Our projected expenses haven’t changed. After the mortgage is paid off we could live comfortably on $36,000 per year, which leaves the additional $36,000 of income to go toward taxes, short-term savings, and retirement.
A financial plan is just words on a page unless you commit to taking action. Even if your financial independence date seems like a moving target, it’ll become more precise as you monitor and update projections based on your true reality.
While it’s disappointing to push financial independence back five years, it’s comforting to know that I’m zeroing in on a target date that’s based on reality and not a wild projection.
Editor’s Note: You can find the original version of this blog at Boomer & Echo earlier this week, here. Note too the several comments at the bottom. In his original headline, Robb used the phrase “Findependence Date.” When I asked why not “Day,” he said he “didn’t want to steal your thunder.” I realize that good bloggers respect others’ intellectual property but let me make it clear that I’m fine with people using the phrase Findependence Day and Findependence. Half the point of this site and sister site Financial Independence Hub is to bring these terms into general usage and displace “Retirement.” — JC
As I look around this room, I see a mix of people: everyone from students and those just embarking on the workforce to people who are already retired.
I’ve worked as a financial journalist for more than 20 years and can tell you the word Retirement is a favorite word of both the financial industry and the media. It’s a handy way to depict a far-in-the future “dream” that conveniently helps banks, mutual fund companies, insurance companies and others sell various financial products, from funds to annuities. And we in the media are almost as fond of the term Retirement: I’ve seldom witnessed a newspaper, magazine or web site that turned away financial advertising!
I’m 61 and you could call me semi-retired. But my message to the younger people in the audience, and even some of the middle-aged ones who fear they’ve not saved enough, is FORGET RETIREMENT!
Is this heresy? Not at all. Because there is a better term: Financial Independence. As some of you may know, a month ago I launched a new web site called the Financial Independence Hub and everything I’m saying here can be found at the site.
In fact, it includes a guest blog by Alan Moore of XY Planning Network in the US who posted a blog on exactly this topic. The X and Y refers to Generations X and Y, so he is providing financial planning advice to millennials and young people. And he too is telling them to forget about retirement but instead to seek Financial Independence.
Aren’t the two terms the same thing? Not really. To me, Retirement is the full-stop retirement our parents or grandparents enjoyed if they were lucky. They got a job out of college, enrolled in a Defined Benefit pension that guaranteed a certain steady future stream of income, hung in for the gold watch for 30 or 35 years, then retired at the traditional retirement age of 65. They could now watch day-time TV, golf, nap, play bridge or putter in the garden to their heart’s content for a decade or three. This is what I call the “full-stop” sudden retirement.
Perhaps some of you here are now enjoying such a retirement. Like Mark over there.
Show of hands: how many of you younger people here think they’ll be able to rely on a DB pension when they’re as old as Mark or me? And how many think they’ll stay with a single employer long enough to collect a big enough pension that they’ll never have to work again?
To the young, Retirement is a remote unattainable concept
The problem with the term Retirement is that it seems so terribly far away for young people. The official retirement age keeps rising: it’s now 67 for younger folk instead of 65, if you’re talking about the eligibility age for Old Age Security, and I wouldn’t be surprised if it reached 70 at some point. So telling a 20-year old they should cancel their SmartPhone service in order to save money for a retirement half a century away is hardly an inspiring message, is it?
But that’s what all the retirement peddlers want you to do: put away 10% or preferably 20% of your income by practicing delayed gratification. They may tell you that you’ll need a million dollars or more in order to retire one day. Too often, sadly, young people hear that and figure it’s so impossible they may as well give up and spend it while they have it.
In other words, they are telling young people that in order to enjoy a decade or two of leisure when you’re old and grey, that you need to deny yourself pleasures like travel or eating out while you’re enjoying your youth.
Let me tell you, any of the grey hairs here would probably love to take their retirement savings and use it to book passage on a time machine that would let them relive the Swinging Sixties. If you’re 20 today, I imagine that your 70-year old future self would feel the same way about your life right now.
A more attainable goal
So what do I suggest as a substitute for the word Retirement? I call it Findependence, which is just a contraction of Financial Independence. I’ve written a book, Findependence Day, which is just the day you’ve reached Financial Independence. The ebook I talked about in my third speech here is a sort of “Coles Notes” summary of that book.
But what do I mean by Financial Independence?
I like to refer people to the definition in Wikipedia:
Financial independence is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.
In practice, I think this means being able to survive without the single stream of income most call a full-time job.
Leaving the nest at 27 is NOT Financial Independence!
Defined this way, Findependence can occur decades before the traditional Retirement, so it’s a goal that young people may find is more worth shooting for. Interestingly, last week I blogged at MoneySense about a study about young people and their financial readiness to leave home. They used what I consider an incorrect definition of financial independence: that if they left the nest and stopped depending on the Bank of Mum and Dad, that they were therefore financially independent. If they could get a job and pay their rent, that was the definition, which resulted in the absurd headline that most millennials hope to be financially independent by age 27.
I don’t think so. Even with DB pensions, the earliest most people aspired to Financial Independence was 55, which is the earliest some pensions permit early retirement. Anyone hear of Freedom 55? That London life campaign was one of the most successful sales pitches for Early Retirement. Yet only a few government workers or business executives who strike it rich ever retire that early.
Why do billionaires keep working?
Why is that billionaires like Warren Buffett continue to work? Or young tech entrepreneurs like Mark Zuckerburg? Don’t you think Zuckerburg, who’s all of age 31 or so, couldn’t be findependent by now? Obviously, they have passion and are driven by purpose.
What does that tell you? Age 55 is way too young to “retire’ in the classic sense of doing nothing: playing golf, watching daytime TV, reading all day. Yes, many people THINK they’ll travel all the time once they retire but as I wrote on another blog last week, travel is overrated and expensive, and is really something you would only want to do some of the time, not ALL of the time.
Integrating the Three Boxes of Life
Findependence is about integrating education, work and play. On my sister site, Findependence.TV, I’m interviewed about a concept called The Three Boxes of Life, which is the title of a classic book by Richard Bolles. In the old days, we started life in the first box, Education, spent 15 or so years there, then graduated to the second box, Work. We stayed there for 35 to 50 years, and then came traditional Retirement, the third box of total play and leisure.
On the video, I talk about there being really only a single day: you work a bit each day and make money, you learn a bit each day and at the end of the day, you may “play” by getting some exercise, reading, watching TV or whatever.
On the site, there are blogs on concepts like mini-retirements and the four-hour workweek. Wouldn’t it make more sense to take the occasional mid-career sabattical or series of three-month vacations earlier in life, rather than saving it all for ten or 20 years of doing nothing when you’re too feeble to appreciate it? That’s why the subtitle of Findependence Day as well as The Financial Independence Hub is “While you’re still young enough to enjoy it.”
Plan for Longevity, not Retirement
Life expectancies are on the rise because of advances in medical science and more of us are practicing better health habits, with a focus on proper diet and exercise.
We can all expect to live a lot longer than we once thought, which is why the “Hub” ends with a section on Aging and Longevity. There you’ll find some blogs by Mark Venning of ChangeRangers.com, who coined the phrase “Plan for Longevity, Not Retirement.” I think it’s a great concept.
And it isn’t just a theoretical concept. On Sunday, we had a dinner party for a female friend of ours who celebrated her 98th birthday. She showed us a custom-printed card from – get this – her co-workers. You see, Meta still works two half-days a week at a local printing company. So she still spends a little time in the Work box. She also reads a lot, swapping books with my wife (Ruth, above), so part of her days are in the Education box. And she still travels and parties, so that’s the Leisure box.
Sounds like Findependence in action!
My latest post at MoneySense.ca is headlined “CRA TFSA crackdown no cause for alarm.” Click through for the full piece. While you’re at it check out this post at our sister site which features a one-hour live web chat featuring myself and Financial Post columnist Garry Marr, who has been breaking the stories about the CRA’s crackdown on excessively traded humungous TFSAs. The crackdown drew plenty of comments and suggestions.
For one-stop shopping purposes and convenience, I reproduce below the original text for my MoneySense blog on how investors should react to this crackdown.
Only minority targeted in CRA crackdown; keep maxing out your TFSA early in January
By Jonathan Chevreau
On social media there seem to be a lot of ordinary investors taken aback by this, even though as I have said on Twitter, 99.99% of the almost 10 million Canadians who have a TFSA hardly need to worry about this obscure attack on a few sophisticated frequent traders of speculative stocks in their accounts.
Anyone who holds index funds, ETFs, blue-chip stocks or fixed income and is holding for the proverbial long term should stick with their plans for using their TFSA, including making a full maximum contribution early in January. Frequent online traders making dozens of trades a day are the target, especially if their trading patterns causes the CRA to view them as running businesses inside their TFSAs: if you or I traded that often we’d be losing a lot in trading commissions, even at the $5 or $10 a pop that most online brokerages charge.
As I have also pointed out, TFSAs are the mirror image of the RRSP, which has been around more than half a century. Even if there is a way to define what an “excessive” gain is, does this mean Ottawa would go back through half a century’s worth of deferred RRSP gains? It seems hardly likely.
TFSA remains best game in a highly taxed town
This is really a tempest in a teapot and I’d hate to think anyone scared off by this would fail to top up their TFSA early in January. As I’ve also said more than once, the TFSA is just about the best game in an otherwise highly taxed town. And as I said in this blog a few weeks ago, the uncovering of an end run that lets the wealthy contort their finances so as to collect for three years the Guaranteed Income Supplement (intended for the elderly poor) suggests that either GIS or TFSA rules or both may get tinkered with sometime in the next few years. So it’s best to fill up TFSAs while you can, just in case Ottawa starts to curtail their use for whatever reason. And that includes maximizing your children’s TFSAs if you’re able.
To be safe, check the CRA’s 8-point audit list
The Canada Revenue Agency has rolled out an 8-point list for a TFSA “audit” but a quick scan of the items should reassure ordinary investors that there’s little cause for alarm. I can see how some knowledgeable do-it-yourself investors who love to research stocks and spend time at their trading terminals might feel a bit uncomfortable but it’s pretty clear the CRA is more worried about those who make many (10 or 15 a day) trades and who quickly liquidate their positions. Also on the list are uses of speculative non-dividend paying stocks, those who use margin or debt to leverage their positions, and those who advertise their willingness to purchase certain securities: again, well outside the realm of the ordinary investor trying to create a little tax-free dividend or interest income.
For most TFSA holders, danger is lack of capital gains not excessive ones
The irony about all this attention to a handful of professional speculators gaming the system for spectacular capital gains is that far too many TFSA users are doing the precise opposite. If all you do is go with a default GIC or low interest-bearing investment in your TFSA, then you’re not doing this vehicle justice. Chris Cottier, a Vancouver-based investment adviser with Richardson GMP, says any young investor with large debts – especially high-interest credit-card debt – should forget about TFSAs until they’ve eliminated that debt. Very few investments can create gains greater than those accruing to those who pay off credit-card debt that approaches 20% per year.
But when are debt-free (except the mortgage), you’ll be better off holding equities in your TFSA than fixed-income investments sporting today’s minuscule interest rates.
MoneySense has long espoused a passive “Couch Potato” approach to investing in broadly diversified portfolios spread over geographies and multiple asset classes. That approach is particularly apt for TFSAs and is clearly the polar opposite of the type of investor the CRA is looking for.
So when January rolls around, do not hesitate to max out your TFSA contribution for the year 2015 and if it’s a quality ETF from a well-established manufacturer, I wouldn’t waste a minute’s thought on the CRA.
Jonathan Chevreau is Chief Findependence Officer for FinancialIndependenceHub.com.
The other day I ordered online a library book published in 2013, which I thought was entitled 65 Things to do When You Retire. But once it arrived and I started to leaf through the pages, I realized with some disappointment that this particular edition of what was evidently a series was dedicated solely to travel, as you can see in the prominently featured word in red on the cover image to the left.
Now I know travel is regarded as one of the bedrock activities of retirement, if not the holy grail itself — provided you’re physically and mentally healthy, financially equipped to bear the costs, and young enough to enjoy it.
A curmudgeon’s view: Travel is expensive and over-rated
Personally, though, I have until recently regarded travel as expensive and over-rated. When I expressed this sentiment to my uncomprehending wife, I would go further by quoting the French philosopher, Montaigne: “The traveller takes himself wherever he goes.” Meaning that you may be able to leave your daily routine at home and at work, but just because your physical body has been removed to some exotic location half way around the world doesn’t mean you will escape your relationships, responsibilities and whatever problems tend to vex you at home.
Clearly, given my somewhat contrarian attitude to travel, I should have picked up the previous book in the series: 65 Things to Do When You Retire, (the volume that does not append the word Travel but instead carries the subtitle 65 Notable Achievers on How to Make the Most of The Rest of Your Life). Judging by online snippets I researched for this blog, this earlier volume was aimed at baby boomers trying to figure out what to do with the rest of their lives once it was no longer necessary (or possible) to commute to a cubicle or office every day. And of course, in last week’s blog about the Boomertirement salon, that was exactly what a group of ten 60-ish boomers were discussing. After all, in America, 10,000 boomers will be turning 65 every day until the year 2030, or so the original volume of 65 Things says.
There was a bit of talk in our session about Travel, but it certainly didn’t dominate the discussion. And yet, in a chapter entitled “Is Travelling Really the Retirement Dream?” RetireHappy.ca blogger Jim Yih said that when he holds retirement workshops, the most common response to the question of what people want to do when they retire is indeed travel. This is cited by more than half the participants.
Yih does introduce an apt term: retirement pornography. He says that those who haven’t really thought much about what they’ll do once they retire tend to go with the easy, automatic answer of “Travel.” Society seems to have planted the idea into our collective heads as something we are supposed to do in order to have a successful life after work. But Yih also nails it when he observes that “travelling is an activity you do some of the time, but rarely is it something you do most of the time.” (his emphasis).
Not that the second volume didn’t attempt to excite me about travel. The anthology begins with best-selling author Ernie Zelinski, author of The Joy of Not Working and How to Retire Happy, Wild and Free, both of which I enjoyed when they were published. I probably reviewed them too, and favorably. The headline the anthology editors placed over Ernie’s essay was certainly tantalizing: Retirement Travel Will Renew Your Sense of Excitement About the World (And Invigorate You at the Same Time).
Embracing the unknown, rather than certainty
“Maybe I’ve been too harsh about travel,” I said to myself, settling in as Ernie told me the “retirement life truly worth living” is out there in the unknown, not in the village of certainty and safety. One suggestion is to visit all 50 of America’s states, which exhausts me just thinking about it. Sleep under the stars? Well, that could be done in the back yard, but we’re later told we should “leave your city once a month” and “leave your country once a year.”
Seems to me both those suggestions can be implemented by ordinary working people on weekends (to leave the city) and on their annual vacations.
Perhaps the problem is, as Frank N Furter said in the cult classic film, The Rocky Horror Picture Show, “It’s not easy having a good time.” Zelinski’s suggestion of a working vacation makes more sense to me, as does an entire group of essays on Voluntourism (combining travel with volunteering). I’m all for killing several birds with one stone and if you can combine travel with a research project, philanthropy and a bit of work, then no doubt I will take it more seriously if and when I reach the stage of Full-stop retirement.
But like the members of the salon, in this prior stage of Findependence, Travel remains low on my personal list of priorities.
My latest blog for MoneySense posted today carries the curious headline that most Millennials expect to achieve “financial independence” by age 27. I put “air quotes” around the phrase financial independence because of course it’s nonsense that merely leaving the nest and putting fewer demands on the Bank of Mum and Dad constitutes true financial independence.
Keep in mind that the research firm cited in the piece seems to use quite a different definition of Financial Independence than the one used at this site or as formally defined at Wikipedia. For research firm yconic, it seems financial independence means merely leaving the nest and landing a job that pays at least the monthly rent: they are merely “financially independent” of mum and dad.
Even with that loose definition, only 56% of older millennials (aged 30 to 33) say they have “achieved financial independence.”
With these savings rates, true Findependence for many millennials is a pipe dream
It’s just as well they’re using such a loose definition because the way the younger generation spends, it’s going to be a long long time before they achieve the kind of financial independence this blog describes.
To sum up the difference, I’d say “our kind” of Financial Independence is being able to stay afloat financially without the traditional source of single income known as “a job” or full-time employment. It’s quite a leap to go from moving out of the parental nest to being able to survive with neither parents nor an employer to keep those regular financial injections into your bank account.
Far from being findependent, almost half the millennials surveyed (46%) admitted “saving money is a struggle” even if they are able to afford to pay the bills. A third say they are living paycheque to paycheque and are barely making ends meet. Fully 43% still rely on their parents for financial assistance, including 37% who look for help paying their student loans off. Does that sound like “our” kind of financial independence?
Non-saving millennials should find a Government job with a DB pension and stay there
I hate to break it to the non-savers but if they don’t start saving soon, they’ll never be able to achieve true financial independence. They had better be prepared to work until age 67 and be able to live on Social Security (in the US) or on the Canada Pension Plan, Old Age Security and possibly the Guaranteed Income Supplement (GIS), or find a good Defined Benefit pension plan somewhere and hang on to the job for three or four decades.
If there’s hope for them, it’s in the finding that most millennials hope to buy a home at some point. I like that because I always say the foundation of financial independence (our kind, that is) is a paid-for home. But even among those who already own a home, 32% got parental help rustling up the down payment. Among those who don’t, a quarter of them (24%) expect their parents to help them with the down payment.
Some millennials do have their act together
I don’t mean to disparage millennials’ aspirations for Financial Independence altogether. Read on our sister site how two millennials aim to be mortgage and debt free in their early 30s. Both of them know all about frugality, saving and deferring instant gratification. Of course they both read the book featured on this web site!
I also suggest reading a guest blog posted on our sister site earlier this week on why millennials should be planning NOT for retirement, but for Financial Independence. The true kind, that is!
Some Christmas book suggestions
Parents who have yet to kick the little birdies out of the nest might consider giving them a hint about what true Financial Independence entails by investing US$2.99 or C$3.37 in either of these e-books. Might make a great stocking stuffer! (Just gift the e-book via Amazon and maybe insert in the stocking a card telling them to check their Kindle).
I suggest too that millennials get a copy of Rob Carrick’s book, How Not to Move Back In With Your Parents. As we speak, my own daughter is reading it.
The other evening ten 60-ish baby boomers got together in a private home in mid Toronto to discuss Boomer retirement and related matters. There were two main groups: most were business owners who have been self-employed for 30 or more years. A handful (including myself and the hostess) had spent most of our careers working as employees in large organizations.
Long-time business owners looking for exit
In both cases, the great question before us was “What do I do with the rest of my life?” The business owners were concerned about exit strategies to monetize their years of sweat equity, which could include outright sale or passing the reins to younger family members.
Long-time employees looking to find a transition business
The other group is considering becoming business owners or entrepreneurs even at this late stage of life, or what I term “Boomerpreneurs.” We may or may not have left the workforce voluntarily but suddenly had some leisure and money to contemplate our next move.
In almost all cases, this was a high-achieving group and while one younger attendee (in his mid 50s) had spent a “mini retirement” of several months in Central America, most of us agreed we were in no way ready for endless days of daytime TV, golf or bridge.
Some were conscious of the extended Life Expectancy theme underlying the “Longevity & Aging” section at our sister site, The Financial Independence Hub. However, others were acutely aware that we all entering the final few laps of the great race of life. The long-time business owners in particular seemed ready for a change, but were aware the transition or exit could well require four or five more years of continued effort.
Actually, this was the second time the group had met. I would have love to have attended the first one in October but had already committed to a three-week trip to Turkey. The focus of the first one was that many can expect another 10,000 days of life on the planet, so what’s your plan on how you’re going to spend that time? As the facilitator, Alan Kay (more on him below) put it, it’s all about “repurposing yourself, not a blank canvas.”
Acquiring new skills — at 60
Interestingly, the hostess (one of only two women in the second meeting; the rest were obviously men) experienced almost the same events as I have in 2014. Both of us had quite independently chosen to attend Toastmasters weekly, to hone our public speaking and leadership skills. She is also attending a Rotman course that prepares you to assume positions on corporate boards. As if that weren’t enough, this high achiever is also taking acting lessons.
Does Business Ownership run in the family?
Her husband, and our host, has long been a business owner. In fact, long ago when I worked on a computer newspaper, I had naively written a piece about him extolling the fact that he was a “27 year old president” of his own computer company. At the salon, he said his own father was a business owner so it seemed a natural step for him at the time. I replied that my father was a high school teacher with security and a Defined Benefit pension plan, which may have explained why I tended to stick with salaried employment within other people’s businesses.
Regrets of the dying
We discussed life purpose, why we are even on the planet, and the five regrets of the dying, a piece published recently in the Globe & Mail. Some felt that one of the advantages of building something even at this stage of life would be to employ the generations following us, including our children.
There was a feeling it’s time to simplify, perhaps to slow down a tad but few seemed to seek a traditional “full-stop” retirement. Call it semi-retirement or phased retirement, depending on circumstances. I didn’t get the impression anyone was suffering financially, so the continued interest in remaining active was more about community, giving back and the like.
Naps in the home office
Some of us work from home, some still go to an office, even if they owned the building in which it was housed. Among the “work-from-home” crowd, which included our host and myself, we confessed there was the advantage of the occasional afternoon nap.
As for the session and what’s next, it’s all rather fluid although the hosts did facilitate an exchange of emails with the intent of connecting on Linked In. Certainly this web site will happily describe further developments and facilitate communications between members and would-be members. It was just such a salon that spawned the Huffington Post.
Pending permission from the other participants, I’ve erred here on the side of protecting actual identities but may update this blog or post new ones with actual names and coordinates as they arise. I can say the session was moderated by Alan Kay, who is happy to be identified as “a fully recovered ad guy, facilitating change through tools like stakeholder consultations and roundtables using his Solution Focus expertise.”
And yes, this often means sitting around a kitchen table like the one illustrated above; you can find him via his website here. Or contact me at firstname.lastname@example.org.
Here’s my latest MoneySense blog, based on a Fidelity media briefing on Monday. Click on the blue type to go directly to the piece at MoneySense.
For one-stop shopping and archival purposes, here it is again below, with different photos and subheads.
By Jonathan Chevreau
You’re probably going to live longer than you think but it if you’re worried about outliving your money, planning to work in retirement is not a panacea, warns Toronto-based Fidelity Investments Canada ULC.
At a media briefing on Monday, Fidelity Canada’s Peter Drake, vice president, Retirement & Economics Research urged those still saving for retirement that they have to take more individual responsibility for their future after work. “You’re going to live longer than you think,” he said, citing steadily rising Life Expectancy statistics going back to 1921. Someone born in 1921 would have a Life Expectancy of about 58, a figure that passed 70 for someone born in the mid 1950s and which passed 80 shortly after the new millennium.
Can an “Encore Career” bridge the gap?
Certainly, the latest data from the 2014 Fidelity Retirement Survey released at the event suggests those falling short of their retirement savings goals are counting on some kind of paying “encore career” to make up the difference. While only 20% of those already retired plan to rely on income from a full-time or part-time job, fully 47% of those still in the workforce expect to have some form of a paying “encore career,” said Drake.
Many will rely on Savings and Housing
Non-retirees also put their hopes into Savings and Housing as a way to make ends meet in Retirement. While only 58% of current retirees say they will rely on income generated from savings in an RRSP or RRIF, fully two thirds of non-retirees (66%) plan to do so. Similarly, while only 36% of retirees believe their home equity will help boost their retirement income, half of non-retirees are counting on it.
Clearly, something has to give and that something appears to be the fond notion that people can just keep working past the traditional retirement age of 65. “Planning to work in retirement is not a retirement plan,” Drake cautioned.
Saying you’ll “just keep working” is of course easily said. Indeed, I’ve given that advice to anyone who’s not quite sure whether they have enough money to retire or not. As I quipped on the radio the other day, it’s better to arrive at the train station five minutes early than five minutes late: similarly, when it comes to saving for retirement, it’s better to oversave than undersave. Your children and the government will thank you for over-saving.
“Just Keep Working” not always possible
Unfortunately, Fidelity’s research shows you can’t count on working in retirement. The poll of some 1,400 Canadians found that of those not working, fully one in five retirees would like to work if they could. However, 15% can’t find a job and 23% say employers aren’t interested in employing retirees.
Then there are health and health care issues. Drake says 38% of retirees not working have health issues that prevent them from doing so. And even for those who are themselves healthy, 12% have to care for another family member. Out-of-pocket health care costs are an important consideration for retirees, Drake said. Even though this is Canada, 30% of health costs are not funded publicly, putting more pressure on finances the older you get. Citing per capital public health care expenditures, the big blips are right after birth and then after 65. The per capita annual expenditure is well under $5,000 from age one to age 64 but hits $5,828 between 65 and 69, passes $10,000 between 75 and 79 and really starts to spike after age 85 – past $20,000 –hitting a peak of more than $24,000 after age 90.
Drake noted that generally speaking, women can expect to outlive men, but the longer they do, the more the problems of dementia – especially Alzheimer’s – can arise.
Challenges of Longevity
Another byproduct of extended longevity is that inflation really starts to bite into the purchasing power of a typical retirement nest egg. While inflation has been low and consistent since the early 1990s, it could rise in the future, Drake warned. And even low inflation can reduce purchasing power. A nest egg of $50,000 today would have the purchasing power of just $30,479 25 years from now even with relatively benign inflation of 2%. If inflation were 3%, the purchasing power of that $50,000 would fall to less than half 25 years later: $23,882. And at 4% inflation, it would have the spending punch of just $18,757.
Jonathan Chevreau is Chief Findependence Officer for www.financialindependencehub.com.
A Novel Approach to Financial Independence is one of the bestselling e-books in Amazon.ca’s Love & Romance category, as you can see in the screen shot to the left. Here’s the link to Amazon’s listing. Depending on the day, it sometimes hits #1 in the category.
Love & Romance? What about personal finance? Well, I’ve always described the original Findependence Day as a financial love story so it’s not as out of the box as it may seem at first blush. Click on the blue link in the title above to find out more about the Romance plot that’s at the heart of the original novel.
The full book features a couple, Jamie and Sheena, who are 28 at the start and follows their ups and downs as a couple over 22 subsequent years. It takes a “life cycle” approach to personal finance and centers around Jamie’s declaration that he will become financially independent (“findependent”) by the time he turns 50.
There are numerous setbacks along the way, including business failure and betrayal, separation, children and more. As CTV Senior Financial Commentator Patricia Lovett-Reid says in the foreword to both the original book and the e-book, money troubles are often the cause of marital disharmony. You can read that foreword, by the way, for free because it’s near the start and Amazon lets you “look inside.”
e-book is a “Coles Notes” synopsis of the original book
The e-book pictured above is sort of a “Cole’s Notes” synopsis of the original book, summarizing the plot but focusing more on the content on financial independence. It’s short (15,000 words) but costs only C$3.37.
Amazon lets you designate purchases as gifts and with Christmas just around the corner, you have to admit it’s pretty cost-effective! Especially if you can change a young person’s life for the better, as we say in the ad below (also shown on the front page of Findependence.TV).
Today’s blog title comes from Chapter 14 of The Upside of Aging, a book we mentioned several weeks ago. This is recommended reading for anyone nearing the traditional retirement age. It consists of 16 essays from various experts, all of whom look at the topic of longevity through various lenses: urban planning, global demographics, healthcare and pharmaceutical research and so on. For example, Ken Dychtwald of Age Wave pens an interesting essay titled “A Longevity Market Emerges.”
Pictured is Dan Houston, president of Retirement, Insurance and Financial Services for the US-based Principal Financial Group, who wrote the chapter I flagged in the title.
Retirees can expect one spouse to reach 90
Houston begins by observing that because of longer expected life spans, the mind-set around retirement is evolving, and for the better. “Couples age 65 now have a 45 per cent chance that at least one will live to age 90,” Houston says, citing the Society of Actuaries, “This may be the first time in history where someone spends more years in retirement than in a traditional working career.”
The downside is of course financial: living another 20 to 40 years after leaving the workplace comes with a “substantial cost,” Houston says, “one that has to be funded. It’s an increasingly challenging prospect given inflation, the high cost of health care, and the risk of outliving savings.”
Try living on $400/month
The statistics, at least in the U.S., are not encoring. Fewer than four in ten pre-retiree households (aged 55 to 70, not yet retired) have financial assets of US$100,000. And even if they did have that amount on the nose, it would generate guaranteed lifetime income of just $400 a month.
Many think they’ll need less income in later life than recommended and many plan to draw down on assets at such high rates (9% a year on average) that assets will be depleted within 13 years. The recommended “safe” annual withdrawal rate is closer to 4%. They underestimate the cost of unreimbursed health care costs: in the U.S. Houston estimates a moderately health retired couple will need US$250,000 just to cover health care expenses and premiums throughout retirement. This is one area that Canadians may be ahead because of our universal health care system.
Don’t count on working in retirement
I’ve said before that the solution to this is to “just keep working,” but of course this may not always be an option. It’s a sad fact that agism still prevails in the workplace and costly older workers may be asked to leave before they’re ready to do so; and eventually body or mind may not permit full-time work even if one can find a willing employer. Houston says pre-retirees tend to overestimate their ability to work for income in retirement: more than two thirds expect to be able to supplement retirement income with some work but in reality, only one in five retirees actually works. That statistic, Houston observers, “reflects availability of work, as well as ability to work.”
Just as disturbing is the fact that 55% of American workers, and 39% of retirees, report having a problem with their level of debt. And those who do manage to save are not saving enough: 43% of workers report that neither they nor their spouse is currently saving for the future, while 57% report the total value of savings and investments is under US$25,000.
Four key investment risks
Even where there is ample savings to invest, Houston lists for key risks: inflation, market volatility, income and longevity. These are all linked: the longer you live, the more inflation can cut into your income. Consider this alarming stat on inflation’s power to erode savings: a dollar invested int he S&P500 in 1971 grew to $2.27 by 1982 but on an inflation-adjusted basis, that dollar depreciated to 96 cents. Houston notes that even annual inflation of 3% will cut a retiree’s purchasing power in half.
This calls for investments that have a fighting chance against inflation: Houston mentions Treasury Inflation-Protected Securities (TIPS, known in Canada as Real Return Bonds or RRBs); commodities, global REITs, natural resource stocks and Master Limited Partnerships.
As if that’s not all enough to keep a retiree awake at night, Houston reminds readers that the “insolvency” date for America’s Social Security system keeps moving closer: 2033, according to Washington’s May 2013 estimate. Meanwhile the over-65 population will double between 2010 and 2050.
As has been noted elsewhere, every day 10,000 baby boomers turn 65. While Canada’s combo of CPP and OAS seems on relatively solid ground, I continue to believe the best way to prepare for a long-lived retirement is to spread your income sources around: employer pensions, savings in RRSPs, TFSAs and non-registered plans, the government plans mentioned above, some part-time work or business income and perhaps rental income from investment real estate.
My latest MoneySense blog is a followup to an interesting piece by actuary Fred Vettese about the curious phenomenon of wealthy couples being able to contort their finances between ages 67 and 70, by which they can receive the Guaranteed Income Supplement or GIS.
Considering that the GIS is aimed at seniors with no savings and minimal pensions, the idea of putting such a gambit in place offends some, although as the blog points out, most of the readers who contacted Vettese just wanted more details on how they could benefit from the strategy themselves.
Hypothetical but max out your TFSA while you can
I’ll be doing more on this but it seems that the strategy is not so much likely to become widespread as it is an example of the inherent contradictions and unintended consequences that accompany such a proliferation of government programs. This one is based on suspending most sources of income from 67 to 70, except Old Age Security (OAS) and the GIS, plus taking tax-free income from the Tax Free Savings Account or TFSA. TFSA withdrawals are neither taxed nor trigger clawbacks of OAS and GIS. In fact, it’s arguable TFSAs were created expressly to motivate low-income workers to save without being penalized by the taxes and clawbacks that accompany RRSPs and employer-sponsored pensions plans.
Will Ottawa move to crack down on this theoretical loophole? Who knows but the TFSA was the Conservative administration’s creation and if they lose the next election, it’s quite possible the Liberals or NDP would move to tweak either the TFSA rules or the GIS qualifying rules. Best advice? Max out the TFSA while you still can!