This year’s market volatility, rising interest rates, increased inflation and housing prices becoming almost out of reach for so many Canadians has folks needing to review their traditional views on retirement. This is something that’s manageable for those 20 or more years from retirement, but for so many Canadians aged 50+, this could mean altering the trajectory of what they expected retirement would be.
Remember the traditional retirement view?
Baby boomers grew up with the philosophy that if they focused on the goal of mortgage freedom by retirement, they’d be set for retirement at age 65. Many even reinforced this with their GenX children. However, we have to remember that this is the generation with workplace pensions, low housing costs, and who were raised by depression-era parents who were debt-averse. They could easily have enough income between their pension and government benefits to satisfy their lifestyle income needs so it made sense.
It doesn’t make sense anymore.
Now we’re seeing a generation heading into retirement who want to find financial freedom sooner, are never going to be mortgage free because of their lifestyle and the cost of housing, and the cherry on top is that they’re also not saving as much as the generations before them. They’re also the generation of fewer workplace pensions, moving jobs far more frequently, and exploring entrepreneurship. They’re acquiring debt, having children later in life, blending families, and seeing their kids end up leaving the family home later in life. Divorce is reducing combined retirement savings and adding to debt loads.
This all factors into what retirement will look like, and more importantly, what steps need to be taken in order to achieve the desired retirement by so many of this and the next generations.
The new retirement reality
As is always the case when I write, this is generalized and each person needs to develop a holistic plan that’s unique to them. However, there are some consistencies that are now part of the retirement reality.
1. When mortgage freedom is still the mindset:
If you have or are going to focus on mortgage freedom, that’s amazing, but set up systems before or at retirement to access the equity in your home if you need the cash flow. Odds are, you’re not intending on leaving your family home to the kids or the expectation is that they’d sell it and split the proceeds upon your death. So use some of that investment return to fund your lifestyle and have some life insurance in place to balance it out.
2. Flexibility & liquidity is key:
With these new realities, and knowing you’re less likely than your parents and their parents were to have a pension provide sufficient income to fund your retirement, it’s important for you to have liquidity. That means that you’ve got retirement savings that offer the ability to give you lump sums when you need it, as well as income sufficient to fund your lifestyle, for what may be a few decades. What does that look like for you, and how much do you need to be putting away for how many years to make that happen? And no, it’s never too early or late to start putting something away. Don’t hide away from the proper planning and, more importantly, taking action.
3. Avoid giving too much of your retirement income to tax:
Since Canadians have the investment tools available to fund their retirement with more tax efficiency, this needs to be planned for and maximized. Registered Retirement Savings Plans (RRSPs) aren’t the only way to invest and save for retirement, and should only be utilized if you’re needing the tax benefit the year you’re contributing, or if you’ve maxed out other tax shelter investments available and it makes sense for your financial goals (this is where professional advice can help). Remember, the RRSP becomes taxable income to you in retirement. The more of your money you’re paying in tax, the less coming into your pocket, and the greater the potential for government benefit clawbacks*. Changes at retirement can be costly and difficult, so proper planning when you’re in the savings process is key. Personal retirement savings should be a priority to produce flexible liquidity throughout retirement.
Clawbacks happen when your total taxable income exceeds the government’s threshold amount ($81,761 in 2022), resulting in part or all of your Old Age Security (OAS) being held back as a recovery tax.
4. Prioritize your future:
Save early, save often and stay invested. Sure, life happens, but if you can be prioritizing your own financial future even a little bit throughout adulthood, you’ll be further ahead. This includes some hard truths:
- Save before you spend aka “pay yourself first” (including sacrificing some luxuries and generous spending)
- Avoid racking up debt, especially rolling that debt into the equity of your home just to rack it up again
- Have contingency plans to help you when life happens, including financial foundations like disability and life insurance
- Work with a rpofessional advisor so that you can map out clear pathways to your goals, and know how (or if) you’ll get to your goals
5. The “bank of mom & dad”:
The generations entering young adulthood and younger have some pretty incredible financial challenges ahead of them, including navigating post-secondary and career paths, student debt, housing affordability, home ownership and the ability to save. Talk to your kids about money, early and often. Engage them in the family finances while they’re still at home so that they become fiscally responsible young adults, and not as inclined to have to come back to the “parental ATM” as they move through life. If you’re going to help your kids financially, be thoughtful about the gifts you give so that you’re not just providing a financial band aid, but rather work with your financial professional to provide a transfer of intergenerational wealth (part of your inheritance). This includes everything from being strategic about paying for your child’s post-secondary education, to helping them on their path to home ownership. Planning can help to preserve your much-needed retirement savings, the equity in your home, and so much more.
Difficult Decisions
While these are general concepts to the new retirement reality, they need to be personalized to your life and your financial plans. If you’ve not yet worked with a professional to talk about retirement planning, don’t delay. Or if you’ve not reviewed your plan, now is a good year to do so as there may be some difficult decisions to make. This could be that, given the market volatility and increase in lifestyle expenses, you’re having to push out some retirement goals. Or perhaps it’s foregoing that vacation next year so that you can save or stay invested. Plans change, and that’s to be expected over time, but those realistic conversations sometimes are the most difficult to begin.
For help with your new retirement reality, talk to a financial professional that you trust and who can take a holistic view so you can minimize your surprises.