Are You Ready??

I wanted to talk about retirement, are you ready? Will we ever be able to comfortably reach that goal?




I also came across an interesting article on Money Sense website. It can be viewed here. I wanted to give my opinion on this. The following is a copy of the article... The red font is my opinion.

10 things they won’t tell you about retirement

The best-kept secrets of life after work.

by Craig Sebastiano 
August 14th, 2008

From the July/August 2008 issue of the magazine.

If you’re like many middle-aged Canadians,you used to think that you would retire at 55. Now you’re hoping for 65. Once you used to smile fondly at the retirement ads that showed laughing grey-haired couples golfing in tropical paradises. Now you have an overwhelming desire to jump out of the sand trap and smack those smug retirees with a nine iron.

We feel your pain. So let us reassure you. Despite what you may think, there is a lot of good news about retirement. We’ve talked to a wide-ranging selection of financial experts (Ahhh, the experts. Did you know I was once invited to become a financial advisor. When I decline and said that I didn't know the first thing about financial I was assured that it was very simple. All I had to do was take a weekend class. Really? That's all this person had to do to tell me how to best handle my finances. Also is this so call financial expert employed by a bank, who would be making money from my RRSP account or are they employed by financial companies also making money from my retirment account. Is there not a conflict of interest there?) and we’ve come away with one conclusion — you’re doing far better than you think you are. Join us as we reveal 10 things that most people don’t know about retirement, but should.

1. You’re not behind at all

The ads make it sound as if 55 is a reasonable retirement age. In fact, for most of us it’s not. The median retirement age in Canada is 62 for men and 61 for women, according to Statistics Canada. Who does retire early? By and large, federal government employees, who ditch work at a median age of 58. You can credit their early departures to generous pensions that are indexed for inflation. But even public-sector employees aren’t hanging up their work clothes at 55.

If you look at the math behind retirement, you can see why most of us stick around the office a bit longer than we might like. For every year early that you retire, you pay three penalties: you lose a year of potential savings, you lose a year of growth for your retirement savings, and you gain one more year of retirement expenses. (oh good! I feel so much better, I'm not behind by not retiring at the age of 55. In fact 55 was never even feasible for me. Well there goes my day dream that kept me on trucking at work.)

Consider a woman who hits 55 in good financial shape, with a paid-off condo and $100,000 in savings. She can count on her savings to produce $4,000 or $5,000 a year in returns, but she’s too young to start collecting Old Age Security or Canada Pension Plan. Unless she resorts to desperate measures, such as selling her condo or burning through her savings, retirement is impractical. (I have to say, this woman did well. If she went to university and graduated at the age of lets say 20 and then entered the work force. Paid off her student loans, purchased and paid off a condo, probably had a few kids and put them through college as well. She was still able to save $100K. Wow. Too bad they suggest that will only be worth 4 to 5K a YEAR.)

But look at what a difference five years can make. If she buckles down and contributes $10,000 a year to her retirement fund during that period, and achieves a 7% annual average return, her savings double to $200,000. That bankroll can generate $8,000 to $10,000 a year in income as long as she lives. At 60, she can also start collecting Canada Pension Plan. If she combines those sources of income with part-time work, a phased-in retirement becomes quite practical. (a 7% annual average return... after the fees of 2.5% (which is average) and I'm assume they are considering inflation (3% a year) and of course a market that as gone straight up with no downfall, she made a return of  over 12% annually. Wait a minute there is no way that was in mutal funds, where is this return coming from then? Savings? Hahahaha... nope)

2. You’ll live longer than you expect

When we’e doing our retirement planning, many of us figure that we’ll live to 80, the average lifespan in Canada. But that average is misleading. It reflects what a newborn baby can expect in the way of lifespan and is dragged down by all the unfortunate people who die relatively young.

If you’ve managed to reach 65 without suffering a terminal illness, you’ll probably live considerably beyond 80. According to StatsCan, a 65-year-old man can expect to live to 83; a 65-year-old woman can look forward to blowing out the candles on her 86th birthday.

And remember — those are averages. Half of retirees live longer, some much longer. Moshe Milevsky, an associate professor of finance at Toronto’s Schulich School of Business at York University, says there is a 41% chance that at least one member of a 65-year-old couple will live to 90. So even if you don’t quit work until 65, there’s a good chance that your retirement could still wind up spanning a quarter or more of your life. (okay, so financial "experts" have been having us save to last until 80... but we will out live it. Chances are at 90 I will also be in a senior home, so higher living cost.)

3. You’ll see more of your partner — a lot more
Sure, you love your spouse, but let’s do a little math here. Chances are, for most of your married life at least one of you has worked outside the home. Subtract sleep, travel time and other away time and you’ve seen your beloved for— at most — six hours a day.

In retirement, that figure can easily double. And continued exposure can cause even happy couples to bicker. Fred and Janet Barnes (not their real names) retired to Dickey Lake, Ont., to renovate a cottage after living in and around Toronto for most of their lives.”His perfectionism drove me a little crazy,” says Janet. “My slapdash methods were hard for Fred to take.” The Barneses eventually figured out ways to divide the work so they wouldn’t get on each other’s nerves.

Other retired couples strike different bargains — maybe the kitchen becomes her territory, while the garage becomes his — but whatever the specifics of the deal may be, the important point is to realize that retirement is not just a financial journey. It’s also an emotional odyssey and you should plan ahead to make the most of it.

Beginning in your 50s, you should start thinking about the activities that will fill your day in retirement. “You’re going to need to stay connected,” says Dr. Randy Swedburg, chair of the applied human sciences department at Concordia University in Montreal. Your many options include going back to school, giving your time to charity, or starting your own business. (So in the name of making the marriage work, we will need to get out of the house and fill our lives with other activities. Sure, that's what I planned to do with my retirement anyways. Not stay cooped up inside) 

4. A part-time job is worth $400,000 in the bank

If your retirement savings are a bit smaller than you had hoped, take heart — a part-time job in retirement can go a long way toward making up for an undersized portfolio.

Let’s say that you can make $20,000 a year from your part-time job. That is about what you could reasonably expect a $400,000 investment portfolio to generate in retirement, says Terry Greene, a fee-only planner with MSC Financial Services Ltd. in North Vancouver. So your part-time job is the financial equal of a $400,000 portfolio. Especially if your part-time job consists of doing work youenjoy, you may find that you never want to fully retire. (Take heart?? First you tell me I don't get to retire at 55, now I don't get to retire at all? And that my $400K investment will only now offer me a return of 5% when before I could grow it at a miraculous 12%? Ya... take heart)

5. Your employer really does love you

The first wave of baby boomers has already hit 60. Millions more will soon hit retirement age. And there are not that many people coming up behind them. “The demographic trends are suggesting that over the next 10 to 15 years, we’re not going to replace the workforce that currently exists,” says Ted Emond, a senior consultant with Hewitt Associates, a human resources consulting firm in Toronto. (WOW! Does anyone else see the bad news here, Babyboomers are just starting to retirer. Millions more will do so soon as well. They will start taking money out of their retirement accounts. Millions of people will be taking the value of there income out of the stock market which controls our mutual funds which is what is in our retirement account in the first place. The stock market moves on buying and selling power. Selling power moves the price down. Some think, myself included, that we will soon be faced with an other market crash.)

The likely result of Canada’s aging society is a potential labor shortage that will make skilled help more and more valuable with each passing year. HSBC Bank Canada, is already attempting to keep older employees in the workforce by letting them work part-time while collecting pensions. Wal-Mart Canada allows its retirees to come back as consultants or to mentor current employees. Count on more employers to do the same as demographics makes skilled employees tougher to find. (So since we have now learned that we don't get to retire at 55, and that we actually don't get to retire at all really. We now found out that it's okay because our boss is going to need us anyways.)

6. Government is more generous than you think

The financial planning industry likes to cast doubt on the future of Canada Pension Plan. In fact, CPP is on solid financial ground after the reforms of a decade ago, according to the federal government’s chief actuary. CPP (or Quebec Pension Plan in the case of Quebecers), combined with Old Age Security, will provide you with an average of $11,500 a year if you’ve worked in Canada your entire life and retire at 65. The maximum you could qualify for is about $16,600 a year. (Ok, let's look at this, we have the millions of babyboomers ketting to collect this right away. How is it funded anyways? By the contribution of the current work force. Is that the same employees our boss is about to run out of?)

Don’t forget, too, that you’re eligible for a Guaranteed Income Supplement if you’re a low-income retiree. “For low-income [earners], government programs are going to provide you with the standard of living you’ve always been used to,” says Malcolm Hamilton, a consulting actuary with Mercer, a benefits consulting firm in Toronto.

7. You may be missing free money

A Sun Life Financial survey found nearly 40% of us have access to savings programs in which our employer kicks in money to supplement what we contribute. But one in five
of us who are eligible for such plans doesn’t participate. As a result, we lose guaranteed returns of 25% or more. (If RRSP contributions, let's say, are matched by our employer it provides if nothing else a protection against the 50% draw downs we have seen in the market. In the last ten years, that as happened twice.)

You should inquire with your human resources department to make sure you’re not missing out. Many publicly traded companies offer employee stock ownership plans with an employer match. If you buy $80 of your company’s stock each month through such a plan, your employer kicks in an additional $20 a month — an instant investment return of 25%. Other companies offer retirement plans in which the company matches your contribution dollar for dollar — a guaranteed return of 100%. In either case, the money is free and you should grab it.

8. You don’t need a million bucks

Financial planners like to say you’ll need 70% of your current income in retirement. To hit that goal, a middle-class couple will need to amass a million dollars or more in savings. But is the 70% figure truly a good estimate of what you need in retirement? (No. You are right, it is not. Not with all the activities I have to do in order to keep some distance away from my husband to save my marriage. And not with the traveling, and life experience I've waiting my whole life to enjoy during my "Golden Years")

Probably not. Brian FitzGerald, co-author of The Pension Puzzle and chief executive officer of Capital G Consulting in Toronto, says
you have many more costs while you’re working than while you’re retired, so your need for cash in retirement is considerably less than the 70% figure suggests. “There’s a bunch of expenses you don’t have to incur in retirement,” he says. For instance, most retirees no longer have to worry about paying off a house, funding their kids’ education, making RRSP contributions or commuting to work. And they pay substantially less in income tax because they’re earning less. (But what about the activities and travel? And have you forgotten I am still working, at least part time.)

So how much of your current income do you really need to maintain your standard of living in retirement? “I’m pretty confident that 50% will do the job for most people,” says Hamilton, the actuary. Of course, if you want to live lavishly and travel constantly, you will need more, but if you’re happy to go on living much as you always have, replacing half of your working income should do the job. (So, according to Hamilton. Now that I am retired and no longer working 8 hours a day, and doing the 1 hour commute; I should be filling this extra time with... what I have always done before? I guess we could spread out the cleaning to take a full day instead of a few hours... Who I am kidding, I hate cleaning I'm not doing any more of that. But if I'm going to be unreasonable, and wish to travel; I better be saving my buns off into my retirement account when I get the chance.)

9. RRSPs aren’t always the answer
Canada has five seasons: winter, spring, summer, fall, and RRSP time. But while we’e annually bombarded with ads telling us to stuff money into our RRSPs, don’ think of those four-letter contraptions as your only option in retirement planning.

RRSPs are not your best strategy if you have high-interest debt, such as a credit card balance. Given the 18% or more you’re probably paying on your credit card debt, you should first devote every available dollar to paying down that costly debt. RRSPs may also not be your best option if you’re a low-income earner, since the tax savings that result from making an RRSP contribution aren’t worth much if you don’t pay much tax to start with. (Hallelujah!! The first retirement advice that does not include RRSP.)

If the federal government goes ahead with its proposal to introduce tax-free savings accounts next year, RRSPs will have an additional competitor for your attention. Ottawa’s proposal, as it now stands, would allow each of us to put up to $5,000 a year into a tax-free savings account, or TFSA. You won’t get any tax deduction
for doing so, but your money will grow tax-free. And you will be able to withdraw the TFSA money without paying any taxes. While the math gets complicated,”I would think people with below-average incomes are better with TFSAs,” says Hamilton, the actuary. (Oh but still a registered account, still in mutual funds. Still at the mercy of the market with high hidden fees.)

10. There’s a world of possibilities 
One option that can instantly multiply your retirement spending power is to leave Canada behind. Mexico, Costa Rica, Malaysia and Panama all enjoy far better weather than we do, and much lower costs of living. “Overall, there is no question you can live here on one-half to one-third what you could in any Canadian city and have a good lifestyle,” says Tom Dawson, 54, who with his wife, Donna, moved to Panama City nearly two years ago from St. Albert, Alta. The 1,800-sq.-ft. condominium they bought overlooks the Pacific Ocean and the Panama Canal, and cost them less than $200,000. Medical care is excellent, locally grown produce is cheap and foreigners who retire to Panama with a pension can qualify for several tempting tax breaks, including an exemption from property taxes (That's right, if you really want to enjoy your retirement leave the country! Leave the children and grand-children, the friends and the relatives. Who needs them anyways. Because this plan does not include the cost of frequent travels or of maintaining a secondary house in your home country.)

I trust you realized that the majority of the red text was in a sarcastic tone. We really need to come up with a font for that. Your current retirement plan may not be enough, but there are other solutions out there other then stocks and mutual funds. You may have to step out of your comfort zone a little bit. But, in the end, we may not have any other choice.