HOW TO MAKE THE MOST OF 10 YEARS OF RETIREMENT PLANNING
For many people reaching middle age, the retirement clock is ticking. Plenty of Canadians in their fifties are waking up to the fact that they have to make up for lost time if they have any hope of living a comfortable retirement.
Those with an employer pension plan may be fine, but they account for only 50 per cent of people in the 55-to-64 age bracket. The other half ? Well, according to a February 2016 Broadbent Institute report, An Analysis of the Economic Circumstances of Canadian Seniors, 32 per cent of 55-to-64-year-olds with no employer pension plan have less than $1,000 in retirement savings. Another 23 per cent have more than $1,000 but less than one year’s savings.
That’s not necessarily because people waste money or are fiscally irresponsible, says David Trahair, a Toronto-based personal finance trainer and author of The Procrastinator’s Guide to Retirement.
“It’s expensive to live, and saving for retirement is discretionary,” he explains. “Many people simply don’t have the money to spare to make large RSP contributions or invest it in places they can’t withdraw it.”
At the same time, consumer debt is higher than ever, Trahair adds.
“According to the Canadian Bankers Association, 60 per cent of consumers pay off their credit cards and don’t pay interest. That means four in 10 can’t. If you can’t afford to pay off most of your debt, then you’re simply spending more than you make. That may be manageable while you’re working, but the problem is not only that you aren’t saving; you’re actually un-saving for retirement.”
There is good news, however: even at 55, it’s not too late. There are steps those who haven’t saved enough for retirement can take to make up the shortfall.
The first is to do the math. Trahair advises people to sit down and review their personal spending in detail.
“Hardly anyone does that, but tracking will help to improve things. There are lots of free online programs that link up your bank account and credit card information to give you a consolidated view of where your money is going.”
Another key exercise is determining the cash flow you will need in retirement, says Daryl Diamond of Diamond Retirement Planning in Winnipeg, author of Your Retirement Income Blueprint. After that, he adds, “look at what sources you have at your disposal, including benefits, capital and income-producing assets.”
Be sure to allow some room to spare, Diamond says. “The biggest mistake people make is pulling back on the numbers. If you just think in terms of what you have to have to make the numbers work, you won’t leave much room for error. You will not have accounted for unexpected expenses or market upheavals.”
Simplifying your finances can also help. “Most people have too many bank accounts and credit cards, which makes it hard to control your finances,” Trahair says. “I recommend reducing the number of potential spending sources: get your accounts down to one or two, and your credit cards to two.”
Doing this upfront work can go a long way toward changing your habits before you’re forced to, he adds. “There are many situations that may arise — a death in the family, divorce, illness, a job loss. If you’re not on top of things, how are you going to fix your spending problem when your income suddenly goes away?”
Once you have a surplus, don’t blow it. “Have the gumption to make that retirement savings plan (RSP) contribution,” Trahair urges. “And don’t spend your tax refund; reinvest it.”
He maintains that RSPs remain the best option, especially for people in medium to high tax brackets. “Then you can withdraw funds when you’re in a lower tax bracket.”
However, anyone with credit card debt should be looking at clearing those up before making RSP contributions.
For those in a lower tax bracket, Diamond says building up capital in a tax-free savings account (TFSA) might be a better choice. “It’s a good idea to eliminate debt and fund your TFSA as much as possible. An RSP contribution is less beneficial if your tax rate is marginal.”
Last but not least, anyone at 55 facing a potential shortfall might have to do a reality check on their timing. “There may be no option but to plan to work after age 65,” Diamond says. “That is, of course, if the opportunities are there and your health holds up.”
Having sat in on focus groups with people who fell short of their retirement dreams, Trahair says it was always sad to hear their stories.
“But just remember, age 55 is not too late,” he adds. “If you think about it, 10 years is a long time to be able to do something positive.”