The Not So Free 55
Couples are having their families a lot later these days, so instead of looking forward to retiring at 55, chances are you’ll have one or two kids who haven’t even gone to high school yet.
Is early retirement still in reach? It can be.
Let’s look at Rick and Kathy who are in their early 50s and have just started to get serious about retirement. They each have adult children from their first marriages but also have a daughter, Becky, who is 13. Here’s their plan:
Work in retirement
Kathy is planning to incorporate work into retirement by starting a little business in addition to her full-time job.
Instead of working for somebody else after she leaves her 9-5 job, she’s hoping to work for herself in something she loves. She’s realistic about what she needs from it: not millions, simply enough to supplement her income.
One of the growing trends in retirement is that many Canadians are incorporating work in their retirement. Some for the money but many just to keep busy and fill in their time. For others it is a chance to maintain social networks and keep some of the healthy benefits that work provides on a day-to-day basis.
Choose RRSPs over RESPs
Baby boomers are often torn between saving for retirement and putting money away for their children’s college education. Even though Rick and Kathy are behind on their retirement savings, they’ve been considering putting money into an RESP for Becky because of the Canada Education Savings Grant.
Consider making retirement savings your priority. If you don’t have enough to cover tuition bills, your children can apply for financial aid or student loans. You won’t have those options when you retire. Besides that, the CESG gives you 20 per cent for every dollar you put into RESPs. The RRSPs, on the other hand, would give Rick and Kathy a minimum 36-per-cent tax deduction. Investing in RRSPs makes better financial sense.
Watch the spending
Rick and Kathy are the stereotypical baby boomers, looking to the next stage in their lives (retirement) and scared about all the research they’re reading that suggests they need to save millions of dollars first. The reality is, a lot of Canadians retire happily without millions in their portfolios.
The key is to understand your spending habits and lifestyle needs. To understand how much to save for retirement, you have to know how much income you’ll require. That means you need some sense of how much income you need today. The only way to do that is to start tracking your expenses. First, keep a list of your spending for a month. Then determine where you can make cuts and redirect your money to your retirement nest egg.
Rick and Kathy discovered that they were spending too much on eating out and nice holidays. They’re saving an extra $300 a month just by eating at home more often, bringing lunches to work and travelling a little more modestly.
When Rick and Kathy started getting serious about retirement they were very sceptical about being able to save more money. Like most Canadians, they were spending first and saving what they had left.
Instead, they were challenged to try to start a disciplined savings plan. The most difficult part of saving regularly is just getting started. Once you start a monthly withdrawal from your bank account, you have to adjust accordingly.
Rick was surprised at how much easier it was to save regularly. He simply treated it as another payout, like a car payment.
Kathy was also pleasantly surprised at their ability to manage the savings month to month: “If the price of gas goes up, we don’t like it but we adjust. If food prices at the grocery stores go up, we don’t like it but we have to eat. If our utilities for our home go up, we have to heat the house. The monthly RRSP contribution is just like that, except that we are paying ourselves first instead of everyone else. You often don’t miss what you don’t see.”
If you think about it, their savings plan is really a way of practising for retirement, when most of us live on less money anyway.
Don’t be overly conservative
Another big challenge for Rick and Kathy was to invest aggressively enough to overcome a late start, without seriously putting their financial future in jeopardy.
With GIC rates at historical lows, their retirement projections failed miserably. They needed to earn a higher rate of return without going too far up the risk spectrum.
The solution: They incorporated part of their retirement funds into stocks – which over the long term, have historically outpaced other investments – and maintained a diversified portfolio.
As Rick and Kathy get closer to retirement age, they should adjust the allocation of their assets.
Take one step at a time
Rick and Kathy have a lot on their plate. Full-time jobs that keep them very busy, an active daughter in sports and activities, family obligations often pulling them in different directions, aging parents who need more care and attention along with all of the other complexities of life.
They’re not unique. Most of us share the same struggles to balance the complexities of life.
Planning for retirement is just another one of those complexities. The key is to not be overwhelmed by the big picture. Take one step at a time and a comfortable retirement should be within reach.