Timing retirement

The first Canadian baby boomers have hit official retirement age. Some may have retired early and later cohorts will wonder if they can follow suit. They all face the same questions: Is time on their side, or will they have to delay retirement? Will they have enough to live on?

It depends on the definition of enough. Boomers have been hit hard by market turmoil—the dot-com bust in 2001, the financial crisis of 2007-2008 and the recent sovereign debt crisis. That has put to the test the notion, popularized in the 1990s, that over the long term stocks outperform bonds. In fact they haven’t.

“What do you do in a market like this? Do you choose to be in a volatile market, or do you say ‘no, I’m happy with 2% GICs’?” asks Don Macfarlane, senior financial advisor at Assante Financial Management Ltd. in Thornhill, Ont.

But bonds haven’t done so well either—not for prospective retirees looking to fund retirement. “It’s a very different game today than back in the early 1990s when interest rates were still able to offer clients 8% in an insurance company guaranteed investment account that could go out, theoretically, as far as 35 years. I did a couple at 20 years; I did a couple at 11 years. The clients are getting 8% for 11 years. Now they’re asking if they can get the same rate again.”

Retirement timing doesn’t depend solely on assets amassed in RRSPs. There are tax-supported benefits, namely Old Age Security. The Canada/Quebec Pension Plan is available at age 65—with reduced benefits for those who take it as early as age 60, and higher benefits for those who delay. Still, these two plans represent an income replacement rate that maxes out at about 38% of the average wage of $47,000.

“CPP/OAS will provide a modest income which needs to be supplemented with private savings and pensions,” says Mike Bayer, a financial consultant at Strategic Analysis Capital Management Inc. in Mississauga. “Do they have a pension plan, a deferred profit-sharing plan or a group RRSP? If they are lucky enough to have a defined benefit pension they should be able to provide a projection so you will have an idea of what that will provide.”

Older boomers are more likely to have pensions than younger workers are. Or bits of pensions. Among Macfarlane’s clients, “They either work for a company and have a pension and a few RSPs or they have moved around a fair bit, like many of us do, and worked five to seven years for each company. In that case, they might have a series of locked in retirement plans and LIFs, so it’s a matter of consolidating and sorting through these to see what’s the best way to go.”

What’s crucial here, says Bayer, is figuring out at what age they can start drawing their pension or locked in account. “Can I take an early retirement? If so, will my pension be reduced and by how much? Does my pension have survivor and/or death benefits? Is my pension protected against inflation? If so, is it partially or fully protected? Would we consider downsizing our real estate to provide additional retirement funds?”

But there’s a more fundamental question, Bayer adds: how does the balance sheet look against the income statement. “Here is where we calculate expenses, income and savings. Once we have run the numbers we can get some idea of what is possible. If you are short of your target you will have to make some big decisions on delaying retirement, investing more aggressively and/or cutting expenses.”

It may mean working a little longer, perhaps part-time, perhaps even in a different field. And it’s not just financial necessity that propels that decision. Macfarlane finds that some of his clients who have retired have converted volunteer work into part-time jobs. Or they’ve set up small businesses. “They’re all not making the kind of money they were making before, but they’re all making a few bucks and have a quality of life in retirement that’s better than just sitting at home.”

Which leads Bayer to pose another question: are you ready, psychologically, for retirement? Many aren’t. “Since retirement is such an emotional decision, we should also consider whether we are actually prepared to give up our working lives and the sense of purpose and identity that goes along with it.”

Still, for some, timing retirement is a luxury others may not have. Explains Macfarlane: “The ones that have their own business have a little more flexibility, working as consultants. I have a couple who are working out of town, a couple of them are getting tired of the lifestyle in Edmonton and getting to town every other weekend. That type of lifestyle is huge in that age group: they’re saying ‘I’d like to retire but can I?’ There are others who say ‘do I want to retire?’ For me and my business, why would I want to retire when I could just hang around and increase my number of vacation days.”