April 5, 2017 – There are countless pieces of advice regarding retirement planning out there. Some of them deal with lifestyle issues. How will you fill your day? Are you sure your spouse shares your vision of how time in retirement will be spent? What will you do to stay sharp now that you’re no longer working? But most deal with the financial aspects of retiring. For people who are nearing retirements (i.e. those in their 50s and early 60s), there really are only four choices that can be manipulated to help maintain a suitable cash flow for your autumn years:
1 Save more
2 Invest more aggressively
3 Accept a lesser lifestyle in retirement
4 Retire later than you planned to
There is a long list of resources and pundits who offer input on the first two items… and virtually no one wants to talk about the third item, because it is seen as a last resort. What about the fourth item?
Retiring later is not always an option, but for those people who have some discretion, it merits serious consideration. To begin, there are plenty of experts who can attest to ‘staying involved’ as a pathway to staying young, vigorous and mentally sharp. Not everyone feels this way, but many people working a bit longer (even if only part time) can attest to the fact that doing so helps in their retaining a sense of worth, identity, belonging and contribution.
At this point, I need to disclose that I am planning on taking my own advice. Less than a decade ago, I told friends I’d retire at 65. Then, when the age for full OAS was raised to 67, I told people I’d work to that age. More recently, even as the age for full OAS has been lowered back to 65, I am thinking of staying in the workforce longer – until age 70, perhaps. Once again, I really enjoy my work – this option isn’t for everyone!
The thing that we all need to remember is that life expectancy has been growing by about two years per decade for many, many decades now. For example, I was about 35 years old when my daughter was born. All else being equal, therefore, one might expect that she would live about 7 years longer than I do. If I make it to age 90, actuaries could estimate that she might stay alive until age 97! As such, people need to recognize that their expected retirement years are greater in number than for any generation in history. My advice is to split the difference on those added two years per decade in your planning. My advice, therefore, is to add one year to your planned retirement age for every decade you’ve been alive.
Here’s how it might work: let the decade of your birth be the last year of your retirement age. People born in the 1950s might retire at 65. People born in the 1960s might retire at 66. People born in the 1970s might retire at 67…. and so on. Did you notice how this splits the difference? For every two years of expected lifespan, one is spent working and one is spent in retirement.
The obvious financial benefit is that by adding modestly to your time in the workforce, you are increasing the number of years you are saving and deferring the point at which you begin withdrawing. That double-whammy can significantly increase either how long your money will last or how much you can spend on an annual basis without running out. There’s a bank out there that runs ads saying “you’re richer than you think”. My rejoinder might be “you’ll likely live longer than you think, too.”
John De Goey is a portfolio manager with Industrial Alliance Securities Inc. (IAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by IAS. Industrial Alliance Securities Inc. is a member of the Canadian Investor Protection Fund.