Adversity options

Real estate and foreign equities did a little worse, but not much. The appreciation in residential real estate and vacation properties, while not at these levels, was still impressive. For savers and homeowners these have been the best of times.

But those with longer memories know that the times are not always good. While Canadian pension funds may have earned 8% per annum after infl ation during the last 25 years, the average over the preceding 20 years was a mere 1% annually. It was a different world then—a world of rising infl ation and low interest rates.

But regardless of whether future returns are normal or disappointing, they’re unlikely to match the returns to which we’ve become accustomed.

Fortunately, people are resilient by nature. They can cope with adversity. While disappointing investment returns and increasing longevity will put pressure on their retirement plans, there are several things working in their favour:

• Many have set their retirementincome targets unnecessarily high. Conventional wisdom suggests Canadians need to replace 70% to 80% of their employment income to retire in comfort. But most retired Canadians replace about 50% and they seem to be enjoying their lives. There is a lesson here!
• Many seemingly unsound retirement plans will be salvaged by timely inheritances.
• While many Canadians want to retire at 60, most have the option to extend their working lives by a few years if need be.

Too many planners ask working people when they want to retire and how much income they need after retirement—as if they knew! Too many plans rest on dubious assumptions that won’t come true. Too many plans are founded on a belief that retirement defi nes our lives; and that we should save whatever is needed to allow us to retire at the appointed time and with a set income, regardless of the consequences in the here and now.

It shouldn’t be like that.

A fi nancial plan should be about living frugally while avoiding selfdeprivation. It should be about balancing the needs of tomorrow with the needs of today. It should be about the responsible management of a family’s financial resources, while at the same time investing in the human capital of family members to ensure they realize their potential as human beings. Then, if reasonable projections suggest a couple’s retirement age will be later than they’d like it to be, a fi nancial planner can help them chart a new course.

A fi nancial plan should focus on the age at which retirement becomes a possibility, not on how much a couple needs to save each year to hit a retirement target plucked from thin air. If things go better than expected, an earlier retirement or a more luxurious retirement becomes a welcome possibility. If the couple encounters adversity the two can always retire later, work part-time after retirement, or live more modestly.

A delayed retirement, with a slight reduction in one’s standard of living, isn’t the end of the world. It’s a necessary accommodation for people managing limited resources in an uncertain world.