New Rules Of Retirement

What Your Financial Advisor Isn't Telling You

Warren Mackenzie, Ken Hawkins

• Publisher: HarperCollins Publishers
• Year: 2010
• ISBN:
  9781443401173
• Topic: Desarrollo personal
• Subtopic: Finanzas personales

The financial advice industry -- including banks, mutual fund and insurance companies -- has a vested interest in our hard-earned savings. Industry advisors are constantly warning us that we may not be financially prepared for retirement. And, feeling anxious about our future, we become convinced that it's a good idea to let them handle our money. After all, they seem to have all the answers. But retirement planning today isn't the same as it was in the past. We're living longer, leading more active lives, with more options about how we want to live once employment is no longer the main focus. For the 1.6 million Canadians who will be retiring in the next five years, the questions at play are more complex than "How much do I need to retire?" Industry veterans Warren MacKenzie and Ken Hawkins have seen firsthand the mistakes that Canadians make in their financial preparations for the future. In The New Rules for Retirement, they offer simple, unbiased advice while at the same time debunking the many myths surrounding retirement.

Part 1

Understand How Retirement Is Evolving

RETIREMENT AND OUR PERCEPTION OF RETIREMENT ARE RAPIDLY EVOLVING. WHEN OUR parents and grandparents retired, spending an entire career working for one company was the norm rather than the exception. On the day workers retired, they moved from a life dominated by work to a life of leisure. Retirement was considered the last phase of a life that could be divided neatly into three parts. The first 20 years was devoted to growing up and getting an education. The next period, of about 40 to 45 years, was devoted to working, supporting the family, and saving for retirement. The last period, which was not expected to be a long one, was devoted to leisure and sedentary activities.

Today we think of retirement not as retiring from life, but rather as entering a new and exciting phase of life. Retirees now have a greater life expectancy than their parents did and they see their retirement years very differently. In a recent survey by BMO Financial Group, 87 percent of respondents believed that the term “retirement” should be redefined. The top phrases they chose for a new definition were, “the next stage of my life,” “the rest of my life,” “the time to pursue my dreams,” and “the second half of my life.” Retirement now marks the beginning of a new life phase as opposed to merely the end of our working life.

Retirees of the last 10 to 20 years have been at the forefront of the changes taking place in retirement living. Compared to the previous generation, they are healthier, thanks to modern medicine, and wealthier, in part due to strong housing and stock markets since the early 1980s. Many of this generation of retirees took early retirement because of the incentives offered at work to make room for the baby boomers coming up behind them. Many retirees could afford to live where they wanted. Although most chose not to move, others downsized and moved to smaller communities with a more moderate climate and better way of living. These retirees developed active lifestyles and saw their retirement years as a time of personal growth. In the process, they changed our perception of retirement.

The first wave of baby boomers will turn 63 in 2009 and will collect Old Age Security in 2011. Many of these people have already retired. As this group ages, the growth in the number of seniors will be staggering. Those 65 and over made up 13.7 percent of the population in 2006, but this number is expected to rise to 21.2 percent by 2026. Researchers estimate that people age 60 and over will number 10.6 million by 2026, a growth of almost 4.8 million people over the 2006 figure. This number is greater than the population of Vancouver, Calgary, and Edmonton combined!

If you are a baby boomer, how will these numbers affect your own retirement? First, you can expect the economic and political power of your generation to continue. Companies will not be able to ignore the sheer size and growth of the seniors market and will develop new products to serve it. In the financial services industry over the past 20 years, products and services were designed to help investors accumulate wealth. Over the next 20 years, the products will be designed to begin distributing wealth, with retirement income in mind. In the real estate development industry, more and different types of housing will be available to seniors. This growing economic power will mean that additional options will be available to you in all aspects of your life—from health care to lifestyle choices to how to invest and spend your money.

Baby boomers are healthier, better educated, wealthier, less conservative and more technologically adept than their parents. They also believe they are not as old as their actual age. In a study done by The Strategic Counsel for The Globe and Mail in 2006, 55 percent of baby boomers age 50 to 59 thought of themselves as younger than their age and only 3 percent thought of themselves as older than their age. People who still believe themselves to be “young” are not going to “retire” as was traditionally known, but will instead remain very active in retirement.

Although retirement as we know it is evolving dramatically, many people contemplating it today have the same concerns as previous generations. Will I be able to maintain a reasonable standard of living? Will I run out of money before I die? Where will I live when I no longer have to work? How will I spend my leisure time? How can I be certain that my retirement will be enjoyable and relatively worry-free?

The options you have as you enter into this next phase of your life are greater than ever before. However, these additional options and choices do not always make decision making easier. You can have a more customized lifestyle but it might be more complicated. Your life might be more rewarding but at the same time more demanding. Additional choices and greater flexibility can complicate the process, making it more difficult to plan. More than ever, the key to a successful and fulfilling retirement is being armed with proper planning and preparation and the right information.

Rule 1

Throw Away the Old Retirement Myths

In planning for retirement, it is important to base your decisions on real facts, not conjecture, and on your unique circumstances rather than arbitrary rules of thumb or generalizations. Here are some of the myths about retirement perpetuated in society, in the media, or in advertising that we think should be debunked and thrown away.

MYTH: RETIREMENT MEANS NOT WORKING

When the term “retirement” first came into use, someone who retired went suddenly from a life dominated by work to a life of leisure. The period of retirement was not expected to be significant in terms of the person’s overall lifespan.

REALITY: Working during retirement is no longer an oxymoron. Individuals are starting to incorporate work into their retirement plans, not only to supplement income from other sources, but also for the satisfaction derived from work. What is different from before is that work will no longer be the main focus of people’s lives. During retirement, work is secondary and must fit into a person’s chosen lifestyle.

Today’s retirees are more likely to phase in their retirement over a period that could last up to 15 years. During this period they might start a new career or business, work part-time, share a job with a colleague, or do some consulting. In short, work can be an important part of retirement and you should at least consider it as a possibility when you are working on your retirement plans.

MYTH: RETIREMENT MEANS LIVING A LIFE OF LEISURE

Retirement is still viewed by some as a time for relaxing, travelling, golfing, puttering around the garden, or taking up hobbies. It is seen as time spent in leisure and idleness.

REALITY: Today’s retirees are more likely to consider retirement as a time for regeneration rather than strictly as a time for winding down. It is a period to engage in meaningful activities, start a new business, go back for further education, or volunteer in the community. Retirement now means being actively engaged in life rather than retreating from it.

MYTH: RETIREMENT IS STRICTLY AN ECONOMIC EVENT

The financial services industry wants you to believe that retirement is an event defined by money.

REALITY: Retirement is an economic event but it is also much more. It is a major life turning point, a time when we come to grips with our own mortality and realize we can no longer take our good health for granted. Retirement is also a significant psychological event, especially for those who have defined themselves by their work. It can be a time when we reinvent ourselves.

MYTH: YOU CAN DETERMINE THE AGE AT WHICH YOU RETIRE

Most individuals approaching retirement believe they can pick their own retirement date and retire on their own terms. They believe that they can choose to retire at a certain age, say 65, when the government programs kick in, or that they can continue to work as long as they choose or until they have sufficient money to retire in comfort.

REALITY: In fact, many people have no control over their retirement date; it is chosen for them. Some people are forced to retire because of health reasons such as sudden illness, work injuries, or a body that has broken down from years of hard physical labour. Others must retire early to care for family members. Many others are forced into early retirement because of mandatory retirement policies or a corporate restructuring. Those who are forced out of their job when they are in their 50s or 60s are often unable to find another one and retire because there is no other work available. A recent Statistics Canada survey found that 27 percent of recently retired men and women had stopped working involuntarily. Of those, 44 percent had retired due to poor health, and 25 percent due to corporate downsizing.

MYTH: RETIREES NEED 80 PERCENT OF THEIR PRE-RETIREMENT INCOME TO MAINTAIN THEIR STANDARD OF LIVING

This is one of those rules of thumb that are perpetuated by many people in the financial services industry and by those who provide retirement planning advice.

REALITY: The first flaw in this theory is that it doesn’t take into account the general income level of those who are retiring. Individuals who have a high income pre-retirement generally need less, as a percentage of their previous income, than those with a lower level. For example, those with an annual family income of $150,000 with no mortgage or extra expenses might need only 40 percent of their pre-retirement income—$60,000—to maintain their standard of living, while those earning $30,000 might need 100 percent, or $30,000. Those who save a good portion of their income preretirement and lead very modest lifestyles might need only 50 percent of their income because in retirement they will not be putting aside money to fund their needs, and their taxes will be lower. Other people plan to spend over 100 percent of their pre-retirement income for at least the first few years in retirement to pay for the trip of a lifetime or other indulgences.

The second flaw in the myth is the assumption that people want to maintain the same standard of living in retirement that they enjoyed preretirement. In fact, many people will gladly accept a lower standard of living if it allows them to retire early.

The amount of income required for a satisfying retirement is based on unique needs and lifestyle choices, not on an arbitrary rule of thumb.

MYTH: RETIREES NEED TO LIVE OFF THEIR INVESTMENT INCOMES WITHOUT TOUCHING THE PRINCIPAL

This myth leads many retirees to try to maximize the cash flow generated by their capital and causes many investors to take on higher levels of risk than necessary.

REALITY: Unless investors have a strong desire to leave an estate to their children or a charity, they can draw down their capital and use their principal as a source of funds to finance retirement. Purchasing an annuity with part of your capital is an easy way to use up capital while still ensuring that you never run out of money. A number of new investment products currently being developed allow for investors to systematically draw down their capital in a very disciplined way.

MYTH: RETIREES SHOULD TAKE LITTLE FINANCIAL RISK

It is a widely held belief that retired investors should dramatically reduce the risk in their investment portfolio by selling off their stocks and purchasing low risk/income-producing securities.

REALITY: This strategy might have been appropriate in the past, when people were expected to live only a few years after they retired. Today, many retirees can expect to live 25 to 30 years after retirement. Over a period this long, the short-term volatility, or risk, of equities will be smoothed out and their superior returns will help to protect capital against inflation. Over the long run, high inflation is a danger that can have a greater negative impact on the purchasing power of assets than the short-term risk of equities. The addition of some equity investments can reduce the overall risk of a portfolio containing 100 percent bonds.

MYTH: RETIREES SHOULD MINIMIZE THEIR RRSP/RRIF WITHDRAWALS

Retirees are often led to believe that they should always minimize withdrawals from their RRSP(Registered Retirement Savings Plan) or RRIF (Registered Retirement Income Fund) in order to allow their investment income to compound tax-free.

REALITY: Retired investors in the top marginal tax bracket can always benefit from allowing their investment income to be deferred as long as possible. On the other hand, those in a relatively low tax bracket but with a relatively large RRSP can benefit from taking out more than the minimum in the early years of their retirement. By spreading the withdrawals out more evenly they can avoid the huge tax bills they may face in their 80s when they have to take out very large sums from their RRIFs at the highest marginal tax bracket. At that point they also risk having OAS (Old Age

Security) clawed back. Retirees generally spend more in the early years of their retirement. Taking the money out earlier also allows them to spend more on the things they want to do while they are still able to do them.

MYTH: RETIREES DO NOT NEED ADVICE

Many investors enjoy the time they spend reading, researching, and managing their portfolios. When retired, they have more time to devote to this “hobby,” and feel they can do it on their own, particularly with online access to investment information and online discount brokerage accounts, which make it easy and cheap to trade stocks.

REALITY: Although in theory everyone can manage their investments effectively, the sad fact is that most people do not. Managing investments is not about buying and selling stocks; it is about following a plan and understanding and managing risk. These are concepts professional money managers understand but many do-it-yourselfers fail to grasp. The large quantity of information available does not make investing any easier; in many ways it makes it more difficult, because more time is spent wading through the random noise of the markets to find the truly valuable piece of information. People acting on their own will show great interest in the stocks they own as they are rising. However, in poor markets, many cannot bear to look at their portfolios and often ignore them, only to see many of their gains wiped out. Emotions often get in the way of sound judgment. When you are young you can afford to make foolish mistakes, but when you are retired those same mistakes can have more serious consequences.

For most retirees, some good advice is helpful. The key to success is getting advice that is free from the conflict of interest that usually exists when financial advisors are paid based on what they sell rather than on the quality of their advice.

MYTH: THE MOST IMPORTANT OBJECTIVE IN RETIREMENT IS TO MAINTAIN YOUR PRE-RETIREMENT STANDARD OF LIVING

This myth implies that the higher your standard of living, the more content you will be. The myth is perpetuated by a financial services industry that has much to gain by equating more wealth with greater happiness.

According to this way of thinking, the more you save, the more your wealth grows, the more you make, the happier you become—and the more you invest in their products.

REALITY: The most important objective in retirement is to maximize your quality of life, not your standard of living. Having financial security and a comfortable standard of living will certainly add to your quality of life. However, research has shown that after your basic needs are met, many other things, such as good health, a good relationship, family and friends, and having a purpose in life that makes you look forward to getting up every day are more important than a higher standard of living.

What you can do now

• Keep an open mind to the possibilities that retirement offers.
• Base decisions on your own goals and personal circumstances.
• Ignore the stereotypes.
• Question the assumptions about retirement.
• Think of retirement as your new career.

The bottom line

Many misconceptions about retirement are based on generalizations that do not take into account the diverse group of current and future retirees and the unique circumstances of each individual. Blindly following some of these preconceived notions about retirement can take you down the wrong path and limit your options and choices for the future. Retirement today is not like it was 20 or 30 years ago. Although some recent retirees will have a “traditional” retirement, the number of people who choose this...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Tables
• Introduction
• Part 1 - Understand How Retirement Is Evolving
• Part 2 - Think about the Retirement Plan that’s Right for You
• Part 3 - Calculate Your Cost of Living in Retirement
• Part 4 - Calculate Your Retirement Income
• Part 5 - Follow a Simple and Sensible Investment Process
• Part 6 - Construct a Solid Investment Portfolio
• Part 7 - Monitor and Manage Your Investments Wisely
• Bibliography
• Index
• Acknowledgements
• About the Author
• Conclusion
• Online Resources
• Copyright
• About the Publisher