What will life be like when you retire? Will you be rich, or struggling to get by? Will you be free to pursue your dreams, or confined to a shrinking world? Remember, there’s more to a great retirement than money alone. You may wonder if your life will be rich in other ways too. Will you be bored and lonely, or will your days be filled with good times, friends and family? Here we look at 10 of the most common retirement fears and what you can do to prevent them from harming your golden years. Read on and you’ll learn how to build a retirement that’s rich in every way.
1. Will a stock market crash wipe me out?
Of all our retirement fears, the granddaddy is being wiped out by a crash. Unfortunately, predicting such crashes before they occur is next to impossible. The best way to manage the risk is to maintain a proper asset allocation, particularly if you’re near retirement. You should keep a healthy allotment of your holdings in cash, bonds, real estate and other alternatives to stocks. And by diversifying your stocks across geographies and economic sectors, the risks of a possible market debacle are greatly reduced.
You can also protect yourself by holding one to three years worth of expenses in low-risk bonds or GICs so you can ride out a crash without having to cash in your stocks. And remember, if you have sufficient wealth to achieve your goals exclusively with conservative investments, there’s no need to take more risk than is absolutely necessary.
2. Will my employer pension be there?
It’s easy to get wound up over whether your pension will fail—it happened at Nortel, after all. But you have less to worry about than you think, especially if you’re in a public-sector defined benefit pension backstopped by taxpayers. That’s because Canadian plans are protected by law, and it’s very unusual for pensions to be cut. (The fact we’re still talking about Nortel, which filed for bankruptcy protection in 2009, underlines how rare it is.)
You can find out if you’re at risk by looking at your annual pension statement, which will show if there is a shortfall in the fund. If you have questions, just call up your plan administrator. But even if the plan is underfunded, the corporate sponsor is required to fund deficiencies owed to pensioners. If the employer itself is in bad shape along with its pension fund, there may be cause to worry. But risk is limited to the extent of the shortfall, so if your pension is 80% funded, you’d lose no more than the unfunded 20%. And if you live in Ontario, the first $1,000 a month is guaranteed by the Pension Benefits Guarantee Fund.
3. Will I be able to stay in my home?
Actually, you’d better plan on it. A large, aging Boomer population means that “for the most part people are going to have to stay in their own homes,” says aging expert Lee Anne Davies. Traditional retirement residences are an expense many seniors simply can’t afford, Davies explains, a situation federal and provincial governments are fully aware of. As a result, health care is now undergoing a shift toward stay-at-home services for seniors requiring moderate care. Part of this change will involve more co-housing among single boomers to not only help offset costs, but to also help support each other, whether that’s comforting someone having a bad day or assisting them with an errand. You can also increase the odds of staying in your home by retrofitting to accommodate walkers or wheelchairs or provide easier access to bathtubs. “Boomers don’t want to burden their children,” says Davies. “They’re seeking new models.”
4. Will my money be taken by an unscrupulous adviser?
The infamous case of Ponzi schemer Bernie Madoff was an ominous reminder that yes, there are unscrupulous money managers out there. The elderly are particularly at risk, since a combination of their wealth and isolation can make them targets twice over.
One of the most important decisions you can make—right up there with choice of career and life partner—is selecting a financial professional you can trust. Always check references and search the web to discover whether a particular professional has been sanctioned by regulators or industry bodies. Some red flags? Advisers who promise sky-high returns, don’t give clear answers about how they’re paid, or who provide complex, jargon-filled responses to simple questions. Even if you trust your current adviser, it never hurts to seek a second opinion, especially when making a momentous financial change like commuting an employer pension. And while it’s good to work with professionals, remember it’s your responsibility to understand your portfolio’s performance and strategy.
5. What will I do once I’m retired?
Sure, some career-oriented professionals miss the buzz of the office when they retire. But the truth is that most retirees love their newfound freedom and never look back. A recent U.S. survey by the Hartford Financial Services Group found that 77% of retirees said they were happier after retiring, and about 42% wish they had retired sooner. “My dad retired at 62 and used to say to me, ‘I wake up in the morning with nothing to do, but by night, I’ve only done half of it,’ ” says Caird Urquhart, owner of NewroadCoaching.com in Toronto.
The key is to keep active. Talk to other retirees about how they fill their days. Take up new hobbies, enroll in a course at the local college or volunteer at a charity. You’re never too old to learn something new.
If you have grandchildren, volunteer to babysit whenever you can, and if you want to travel, the time is now. While you’re at it, consider entertaining more at home, especially now that your own friends are probably retired as well and looking to reconnect.
6. How will I cope emotionally and financially if my spouse dies?
Life goes on even after our soul mate passes away, so it’s important to have a plan in place to cope effectively. Start by putting an up-to-date will and estate plan in place. Make sure you’re up to speed on what bank accounts and investments you have, and where to find the account numbers. “A big mistake people make is not being involved in joint finances and planning prior to losing a partner,” says retirement and estate planner Anna Knight of Toronto.
Ensure that all non-registered accounts are held jointly, otherwise you’ll need a will and death certificate to access bank accounts. In this digital age, it’s also key to keep a list of all passwords in a safe place, so the surviving spouse can easily access those accounts. Most importantly, have a plan in place that ensures the surviving spouse will continue to have sufficient retirement funds. Many retirees rightly fear a loss of income when one spouse dies. And finally, have a conversation with the kids so they’ll all be in the loop on these issues. “It’s not a Thanksgiving dinner topic of discussion,” says Knight. “But it’s something you should have a family meeting about before the unexpected happens.”
7. What if I become disabled and can’t make decisions for myself?
Make plans now, while you’re still able. In the event of incapacity, someone you trust should be authorized to act on your behalf. You can do that by naming both medical and financial powers of attorney in your will. “Put some thought into who you name—and have a backup,” says Knight. “It could be your spouse but you may also want someone else in case your spouse dies before you.”
As well, consider buying a critical illness insurance policy that pays out a lump sum. Some policies even allow you to get your premiums back after 15 years if you don’t use them. And finally, do a cost-benefit analysis to see if long-term care insurance will fit into your budget. Generally speaking, the younger you are when you get one of these plans, the less expensive it will be. Still, if you find it too pricey, you may be just as adequately protected if you own your home and use it as your back-up plan. While most people are able to stay in their homes for life, the few who need substantial assistance can fund it by selling their homes. “Just don’t touch the equity in your home and that will be your insurance policy,” says Knight. “You can simply use the capital from your home to finance a long-term care arrangement if you eventually need that service.”
8. Will I outlive my money?
Many people save and invest diligently throughout their working lives, but often overlook one crucial aspect of retirement preparation: a written financial plan. “There’s no magic to it,” says tax and estate planning expert Jamie Golombek. “You need some kind of estimate in writing based on your personal situation to determine how much yearly income you’ll actually have in retirement. Otherwise, you’re going to be stressed out and worried all the time.” Have a professional run the numbers for you. If it turns out your money isn’t likely to last, the recommendations will be straightforward: spend less or earn more money.
To make your nest egg last, you’ll need to account for inflation. Unless you have considerable wealth, in today’s low interest-rate environment your portfolio must include some stocks so your assets keep growing in retirement. Fixed income is also key, as you can draw on it when markets drop without selling stocks at a low. If you’re still feeling anxious about your money lasting, consider buying an annuity, which guarantees you a regular income for life.
9. Will I burden my heirs with estate duties?
If your estate is simple, it’s reasonable to hand off the task to a family member or friend. But estates are frequently complicated by detailed plans that involve distributing gifts to various individuals and charities, plus intricate probate rules that are continually changing. “Staying on top of all the regulations is difficult if you make things too complex,” says aging expert Lee Anne Davies.
If you do decide to have a friend or family member execute your will, she adds, avoid naming more than one co-executor, which adds risk, due to the inherent problems with having more than one person in charge of overseeing the various decisions and actions required. Above all else, if you want to avoid burdening your heirs, focus on estate planning when you’re younger, before your health starts deteriorating.
10. Will I have enough? What if I want to retire rich?
The amount you need to save depends on the lifestyle you want in retirement. The good news is you’ll probably need a lot less income than you did at the peak of your working years. Many of the expenses you had in your middle years, such as your mortgage and the costs of raising kids, will be gone.
Couples who are looking for an average middle class lifestyle in retirement will need about $625,000 in savings if they retire at age 65. That should provide $55,000 a year (before taxes) in annual income, and of that $30,000 will come from CPP and OAS.
To get there, a couple should plan to save around $8,000 each year in today’s dollars in their RRSPs for 35 years (you have to save the refunds too), assuming a 3% real rate of return. If you don’t have that much time, you can expect similar results if you both save around $18,000 a year (plus RRSP refunds) for 20 years. Go to moneysense.ca/magicnumber to find corresponding figures for single people and early retirees.
What if you want to be truly rich? Couples wanting a deluxe retirement—$100,000 in annual income before tax—will need roughly $1,750,000 at age 65. They should save about $20,000 a year plus RRSP refunds for 35 years, or $45,000 a year plus refunds over 20 years. It’s not easy, but if you can do it, you’ll have cash to splurge on exotic travel, high-end vehicles and whatever else your heart desires in your retirement years.