We all have visions of what it takes to retire rich – finally savouring a taste of the good life, with first-class travels, fast cars and martinis by the pool. But, as Peter Wilson discovers, come age 65, many of us are in for a shock.
What does your roadmap to retirement look like?
If I had retired rich when I left the Vancouver Sun a few months ago, you wouldn’t be reading this, because I would never need to work again. But, given a chance, and if I keep on supplementing my income with freelance-writing work for the next five years, I could get there yet. Even now my wife and I are okay by the standards of most British Columbians. For one thing, I have a pension, and that has become a rarity for anyone who worked in the private sector. We have RSPs and other investments and an extended health plan. Our house has long been paid for, and it has a new roof and a just-installed high-efficiency gas furnace. We’ve loaded up on the latest in electronic gadgets and gizmos and replaced all our appliances. As well, we can afford to buy another Honda CR-V in a couple of years. And, according to my financial adviser, if my wife and I keep spending at our present careful – some might say penny-pinching – rate, we’ll never run out of money. But, oh, it could have been so much better. You’ll note I said a Honda CR-V – not a Porsche or even a Lexus. And when we take vacations, it won’t be first class to Australia and back twice a year, along with a cruise off the Amalfi Coast. Plus, we’re going to be doing our own gardening and housecleaning, much as we hate it.
The retirement myth
The dream for all boomers, of course, is to retire rich. For decades, golden-hued TV ads have shown couples – wife still youthful with a couple of vague wrinkles around her eyes, husband slim and jut-jawed – drifting off into a future of perpetual world travel, golf, photogenic grandchildren and, apparently, fly fishing in northern lakes accessible only by float plane. This myth quickly dispels when it collides with a few hard facts offered by Vancouver-based financial planners and advisers who know it takes more than wishing and dreaming – and the strange boomer belief that the good life will continue forever and ever – to make it so. According to Lynne Triffon of TE Financial Consultants Ltd., boomers in particular often have an unrealistic sense of entitlement when it comes to how they’ll be able to live in their retirement. “There has been a real shift in what our expectations are,” says Triffon. “In fact, many people now think they should have a better lifestyle than they had during their working career.” Ah, if it were only that easy. But a clear, cold look at the figures shows that if you want to retire rich or even close to it, you’d better get moving on it now, because it’s going to require that you have a sizeable chunk of change in your jeans. [pagebreak]
What's the magic number for a wealthy retirement?
But what, you ask, is rich? It is, of course, a relative term. In many ways, say the advisers, it depends on how big you lived before you retired. Some people would be happy to have just $2,000 a month after taxes; others would be cheery at $5,000, while others believe nothing less than $100,000 or $200,000 a year in after-tax income would suffice. But let’s be arbitrary and go for $100,000 after taxes (rich for some, not so much for others) as a goal. Otherwise things could just get plain scary, because $200,000 after taxes – depending on age of retirement, tax situation and a mass of other complicating factors, including the fact you most likely don’t have a defined benefit pension from an employer – could require you to have mounted up $5 million to $7 million in RSPs and other investments. Besides, according to Clay Gillespie, VP of Rogers Group Financial Ltd., if you’ve built up that much money, you probably don’t really need a giant income. “Typically, we find that people with $5 million or $6 million, they’re not needing $200,000 after tax because they already have their lifestyle.” In other words, they’ve got the vacation places, the boat, the cars, the gadgets and gizmos. Like the rest of us, what they spend from now on is largely discretionary, albeit on a grander scale. So today’s after-tax equivalent of $100,000 annually to age 95 (your mileage may vary, but this is generally what financial planners pick as to how long you might possibly live) is our target figure. This means investments of somewhere – again, depending on enough variables to make your head spin – in the $2-million to $2.5-million range, not including real property (because you always need someplace to live, say the advisers). Even here we have to be cautious when we see numbers like these thrown about. “For a certain person with a certain set of expectations, this could be the right number, but that may only be 10 per cent of people and the other 90 per cent have higher or lower expectations,” says financial adviser Darrell Oswald of Phillips, Hager & North Investment Management Ltd. Os-wald recommends, not surprisingly, that you sit down with an expert you trust and work things out over a period of time.
When to start retirement planning
When should you do this? Well, right now might be a good idea if you haven’t yet and you’re edging rapidly toward retirement. Otherwise, doing it in your early forties would be good. In your thirties would, of course, be even better, although you might be capable of doing nothing more than paying down your mortgage more quickly, because, terrifying as it sounds, people are actually retiring with debt these days. “If you don’t map out a plan to get from A to B, you won’t get there,” says investment counsellor Gina Macdonald of Macdonald, Shymko & Co. Ltd., who is in her thirties. “If you’ve got $100 in your wallet, it will vapourize. Even me, if I have a hundred bucks sitting in my wallet, I’m thinking, ‘What can I spend it on?’” Malcolm Ross, president of Investaflex Financial Group, says that sitting down with a planner is also a time to define things other than just your financial goals, which he calls legacy planning. He recommends including things such as providing for the education of grandchildren. “Once you understand the life goals and legacy goals of the client, or the client understands them for themselves, then they can actually start to determine their cash-flow needs,” Ross explains. However, most of us – even savvy owners of successful businesses, according to the planners – procrastinate when it comes to getting a grip on our retirement futures. And this could be because we believe we’re going to be found wanting by a financial planner and will be lectured on our profligate ways and that, in any case, we’ll never come up with the wherewithal to provide the 70 to 80 per cent of our pre-retirement income that tends to be the standard goal in the financial-planning industry. “Maybe it’s because it’s in the back of their mind that they should have been saving, so they don’t want a physical person also telling them that,” says Macdonald. “And people have a huge fear of the unknown, but a lot of them are really relieved when they actually go and meet with someone, because the imagination is always worse than the reality.” And, Macdonald adds, even if things aren’t as you’d hoped, at least you know. “You may not be jumping for joy and skipping out of here,” she says, “but we give you options and steps you can take to get towards your goal.” Oswald agrees: “The picture may not look as rosy as it would if you had started 10 or 20 years ago, but you can probably still come out with something that can work for you. And now you’re doing it with discipline instead of hoping for the best.” Unless, of course, you’re overly optimistic or outright delusional. [pagebreak]
Realistic retirement plans
“We have people who come in and say, ‘I’m a lawyer and I make $1 million a year and I’m 55, and I want to retire in two years and I’ve got $200,000 in my RRSP,’” says Gillespie. “‘Well,’ I say, ‘you’ve got a problem.’” The best way to start, say the advisers and planners, is to get your numbers crunched. That’s done with sophisticated software, often proprietary, that can factor in all the niggling details of your particular situation. Phillips, Hager & North’s Oswald fires up his company’s revised software that’s being launched this fall – capable of running 1,000 scenarios at a time – and offers the example of a married couple: “He’s age 50 and he wants to retire when he’s 60. His wife is 53. She wants to retire in three years. He’s currently making $200,000 a year at a 40-per-cent tax rate.” The man is saving $23,000 a year. His wife, who earns $100,000 a year, is saving $12,000 annually. They have $350,000 in RSPs and $1.2 million in other investments. There’s also an inheritance of $300,000 at age 65. Plus, there are outflows for college for the children and home renovations. And currently, they’re living a $143,000 lifestyle after tax, which they want to maintain until age 69. After that, they’re going to taper off to 70 per cent. Looking good? Well, no. The software quickly tells us that they run out of money when they’re 69. “Your expectations are way loftier than you can support,” says Oswald. “So what are the decisions that you need to make today in order to change this picture?” Ross says that business owners face their own particular set of problems when they want to retire, largely because so much of their investment is tied up in their enterprise. This is even more complicated when children will be taking over. “As soon as Dad comes up to retirement age, the kids are saying, okay, we’re going to be taking over running the business and Dad is saying, well, all of my capital is tied up in this business. I don’t have the liquidity and I’m going to keep my finger in the pie.” This also means, says Ross, that Dad isn’t likely to want to make new capital investment, which annoys his children. “Part of the goal with the business family is to encourage the owners to start diversifying out of their business into some kind of savings plan: RSPs and, if it’s later years, then consider doing individual pension plans that are going to create some deductible income from the corporation. And then to look at different structures, including holding companies and family trusts that will allow them to flow dollars outside the holding company.” Another solution is to not hand off the business to the children at all. “I can’t tell you the number of times we’ve had business owners walk in here and say, ‘I want to hand this business over to my two kids,’ but they don’t want to make the choice between the kids,” says Ross. “And we’ll say, ‘If you sold the business and gave the kids the cash, would they go into partnership together?’ And they would say, ‘Not a chance; they can’t agree on anything.’” [pagebreak]
Saying au revoir to early retirement
For individuals, putting off retirement for a number of years is one of the best ways to deal with running out of money before running out of life. And, of course, beefing up those RSP contributions. Oh, and lowering expectations, something that a lot of boomers don’t want to hear. Another alternative is to get into more equity investments that promise a higher return than, say, a conservative average over the years of six per cent. But that adds risk. This means, says Ross, that you have to examine three things: your appetite for risk, your ability to take risk and your need to take risk to avoid running out of money before you die. “If I need to be taking more risk than I have the ability to afford, then I have to reset my expectation on my cash flows,” says Ross. “If someone says I want to have $100,000 in after-tax cash flow and I’ve only got $1 million in capital, and therefore I’ve got to earn 10-per-cent-plus in order to fund the taxes, that’s probably not going to be a realistic expectation.” This is especially true, say the advisers, as we go further into the 21st century, when getting another one per cent on investments may be tough. “One per cent didn’t mean much in the ’80s or ’90s, when you were getting 12, 13, 14, 15 per cent, but that isn’t going to be the case going forward,” says Gillespie of Rogers. “We feel, in the equity markets, you’ll get eight per cent, and fixed income will get you about 4.5. So one per cent matters, and it’s hard to get.” Another alternative for those facing a shortfall between expectation and reality is to move from the Lower Mainland to places where property is less expensive and day-to-day costs are lower, although the opportunities for this – especially when it comes to Vancouver Island and the Okanagan – have lessened considerably. There’s also the route I’ve chosen: to continue working, but not full-time. “A lot of people who start out saying they want to retire at 55 don’t really mean fully retire,” says Triffon. “They say, ‘Look, I’ve been doing this for 30 or 35 years and I want a change and I want to go and work in a different type of business that’s of more interest to me.’ And they’re prepared to work part-time to supplement their pensions to pay for the travel and the extras. And some of us love what we do, but we just don’t want to do it as many hours.” Oh, and before I forget, there is another worry: health care. While Canadians have long depended on Medicare to keep them from the huge bills generated by catastrophic illness or even end-of-life care, this may not be so in the future as boomers age. “The front edge of the baby boom is now 62, and you use 90 per cent of your health-care dollars in the last five years of your life,” says Gillespie. “If you think we have a problem with the health-care system now, it’s barely under strain given what’s going to happen.” [pagebreak]
Retirement realities in Canada
Right now Gillespie – although he knows others might disagree – doesn’t believe the financial products, such as catastrophic-illness insurance, are well-enough developed in Canada. This means that there’s a good reason for hanging on to your house. The equity in it may go toward either illness or long-term care – which, in high-end facilities, can cost in the range of $6,000 a month. Or you might consider a life-insurance policy. Once you’ve faced your future squarely, you also have to deal with the fact that the money you’ve piled up has to start to dwindle. And that makes a lot of people, even those with high expectations who once thought their money would never run out, nervous. “I don’t care how much money you have; unless you have way more than you need, this is disconcerting because it’s no longer your ability to earn that generates the income,” says Gillespie. “And that’s a really big problem for people who were self-employed and always in charge. They have big trouble depending on income coming from another source.” In fact, planners sometimes have to convince their clients to spend their money. “Some clients were talking to me about flying to visit some people in Australia, and the wife was saying, ‘Well, I just hate those long flights,’” says Ross. “And I said, ‘Why don’t you fly first class? You can afford to do it.’ And she said, ‘Oh, I just can’t bear spending the money difference.’ And I said, ‘Yeah, but if you don’t fly first class, probably your kids will.’” Which brings us to another point: these days, boomers and those slightly older aren’t planning on leaving their kids that much. “What I find interesting is that, certainly among our clients, there is a recognition that they would like to leave something to their kids, but they don’t necessarily want to compromise to a great extent their quality of life to leave an estate,” says Ross. “For the most part, they’ve prepared the kids for life by giving them an education and the opportunities, and their kids are financially independent themselves.” And that’s my plan. When I finally go, at 95 on the dot, I won’t be taking it with me because there will be nothing left.