We have some good news. By the time you turn 60, you may be worrying about whether you have enough — but it turns out your retirement dreams are likely surprisingly close. Even if money is tight, there are several simple things you can do to improve your prospects.
You need less than you think
Many advisers say you need scads of money to retire, but most middle-class Canadians with paid-off homes can retire on surprisingly modest amounts without sacrificing their lifestyles. “You don’t really need a fortune to retire,” says Norbert Schlenker, a fee-only financial planner with Libra Investment Management of Salt Spring Island, B.C.
Living well is even cheaper in your 60s than it was in your 50s. You’re probably no longer making mortgage and debt payments, supporting children and covering work expenses — and don’t forget: when you retire, you no longer need to save for the future. With reduced spending, you need less income, so your taxes go down too (plus you benefit from a number of extra tax breaks specifically for seniors). If you’re a typical middle-class couple with your home paid off, you’ll only need about 50% to 60% of the income you earned much earlier in life to live an equivalent lifestyle.
A typical middle-class senior couple spends only about $40,000 to $60,000 a year. But it feels like you’re living on an income of almost double that, compared to your 30s and 40s. On top of that, this is the decade when government pensions kick in to give you a big leg up. The Canada Pension Plan (or its Quebec equivalent) plus Old Age Security typically provide a senior couple with almost $30,000 a year after age 65, if you’ve worked at average-paying jobs most of your adult lives. With that level of support, you’ll only need to come up with a further $10,000 to $30,000 a year. That means you’ll need a nest egg of just $250,000 to $750,000 at age 65, based on a sustainable withdrawal rate of 4% plus inflation adjustments.
The part-time solution
If even $250,000 seems out of reach, don’t fret. You don’t have to keep working full time until you’re 70 (although increasingly, if you want to, you can). Picking up a bit of part-time money doing something you enjoy makes a surprisingly big difference. If you only have $190,000 saved at age 65, for instance, then working part time for another three years at a garden centre earning $20,000 a year allows you to live as if you had retired at age 65 with $250,000 in the bank. You just use half your garden centre income for living expenses, and save the other half.
Reduce your risk
No matter how much you have saved, your 60s is a good time to reduce the overall risk level of your investments. You should try to protect yourself from four different kinds of risk: market risk, inflation risk, the risk of picking bad investments, and the risk of outliving your savings (called longevity risk). As Schlenker advises, “the prescription is having a diversified portfolio, so no matter what happens, not everything in your portfolio will go wrong.”
The equities in your portfolio will help protect you from inflation risk, while government bonds and GICs will help protect you from market risk and the risk of poor investment choices. Life annuities can help protect you from longevity risk. You should also increase your portfolio’s overall allocation of safe investments, such as GICs, short-term investment grade bonds, or real-return bonds. You’ll find lower risk helps ensure a more secure retirement.
The top financial lessons from my 60s — Dave Gower
I’ve been retired going on 11 years now. I like to joke that with that amount of practice, I’m getting pretty good at it. What I’ve found is that planning a retirement life with a great long bucket list of things to do is kind of a waste of life. To me it’s the freedom that’s so joyous.
I’m 67 now, and financially I’m comfortable. I earned a good pension from working 33 years for the government. Having the place paid for, so you’re not paying rent and you’re not paying mortgage payments, I think is absolutely crucial.
It’s important to find interesting things you like to do that turn your crank. I’m doing renovations on my 170-year-old house right now. I’m also active in the community doing volunteer work. In terms of lifestyle quality, those kinds of things are important to me but take almost no money.
I found after I retired there was a huge drop in what I needed to spend. I’m finding that my pleasures in life become simpler and simpler. Getting older does that for you. You no longer want to go skiing in the Alps, for example. It just seems like too much work.
Money is necessary for a decent quality of life, but when you have money beyond a certain point, it’s not so important. I’ve seen people where I’ve thought quietly to myself that the money is getting in their way. People can get obsessed with things like making a 10% return on their investment. I think to myself, “You’ll be dead in two years if you keep worrying like that.”
The money I have on this side of the tax barrier is in money market funds so I can get my hands on it for things like renovations. The money I have on the other side of the tax barrier — in RRSPs, in other words — is in mutual funds. I invest conservatively. Although I have an MA in economics, I’m happy to leave the investing to others. I’ve done reasonably well. My investments are down but a lot less than some of the horror stories I hear and far less than if I went cowboying around doing things like day trading.