Changing family arrangements and the new normal of debt are just two factors that have altered people’s retirement prospects
If you ask Paul Shelestowsky to pick one aphorism for Canadian pre-retirees to follow, he’ll probably go with the old standby: “failing to plan is planning to fail.” As cliché as it sounds, it’s a piece of advice that too many people are failing to act on.
“I always say, it’s a lot easier to see us five years before you retire and discover a problem than to see us five years after with no money left in your nest egg,” said the Senior Wealth Advisor from Meridian. “People in their 20s, 30s, and 40s may think retirement is a long ways away; when they get to their 50s, it starts to feel real, and suddenly they’re under pressure to navigate one of their biggest life changes.”
Those who find themselves cramming for retirement can fall into any number of traps. One common issue, according to Shelestowsky, is relying on rules of thumb: the general recommendation to have one million dollars socked away, for example, doesn’t apply to every person’s situation — especially given how much times have changed.
“StatCan has reported that close to 40% of Canadians are still working between the ages of 65 and 69,” he said. “Some Canadian adults have their 75-year-old parents living with them; sometimes that means they get help with the finances, but a lot of times they don’t. Similarly, you can’t just assume that your kids will move out when they’re 25 anymore.”
Debt is another variable that’s taken on more significance in pre- and post-retirement. As Shelestowsky noted, one could expect that their mortgage would be settled as they leave the workforce as recently as 10 years ago, but that’s no longer the case in many households. Debt-to-income ratios have reached worrying highs, with average Canadians owing $180 for every $100 they bring home.
“How can you retire when you’re having troubles getting by with your regular income, and then have to live on 60% of that?” he said.
Real estate investment isn’t what it used to be, either. Many millennials are delaying marriage, parenthood, and many other life milestones; couple that with runaway housing prices in many jurisdictions, and it’s easy to see why so many house-rich, cash-poor older Canadians are turning to reverse mortgages or home equity lines of credit.
“I don’t think HELOCs are a bad thing necessarily,” Shelestowsky said. “If you can find a decent low interest rate, and you’re not paying too much in legal fees, it can give you an extra $10,000 a year for 10 years to help you stay in your home. For a lot of people who aren’t ready to move and can handle the payments, it can be a good option.”
Many Canadians aren’t as lucky. Among the worst-case scenarios that come to his mind is when people just live on OAS and CPP benefits, which he estimated would give someone between $1,700 and $1,800 monthly if they’re maxed out; for married couples who made all the proper contributions, it still represents under $42,000 in gross combined income.
“The government never meant for OAS and CPP to serve as people’s sole retirement income source,” he said. “Back in the day, people could comfortably sock away an extra $200 a month when they’re 20 or 30 years old; now you could say debt is the new normal. And to have a defined-benefit pension plan you can count on in your old age … that’s almost unheard of nowadays. Companies are shifting toward defined-contribution plans, but even that’s not a staple perk anymore.”
Given all these challenges plaguing Canadians, Shelestowsky argues that the need to sit down with an advisor to work on pre- and post-retirement budgets is absolutely crucial. In fact, the benefits of working with an advisor go both ways: even those in good financial shape can get much-needed reassurance.
“I’ve had clients come to me saying they want to be able to retire when they’re 65, but they’re worried they might not make it,” he said. “But when we sat down and figured out their goals and where they are now, we found they were actually on track to retire at 62. The peace of mind that gives is huge, especially if those three extra years would have been spent doing work that they didn’t want to.”
Being told they’ll have extra money in retirement would be a pleasant surprise for many Canadians. But an unexpected estate of $500,000, for example, opens a whole new set of questions — how much of it is taxable, how much is probable, how much can be gifted — that have to be hashed out.
“People often overestimate how much money they need in retirement,” Shelestowsky said. “They don’t consider how pension contributions, the unemployment insurance, and all these other deductions will become non-issues. With proper retirement planning, they get a much more realistic roadmap.”