So you’re in your fifties and haven’t started saving for retirement. You’re wracked with worry and guilt because you don’t have a hefty nest egg stored aside for your golden years. Guess what? It’s still possible to stop working 10 years from now and retire comfortably. Or at least, that’s what Chartered Professional Accountant David Trahair’s sixth book, The Procrastinator’s Guide to Retirement promises.
Sound too good to be true? The following is an edited conversation between David and MoneySense’s Jonathan Chevreau, where the two discuss the best strategies for procrastinating pre-retirees to play catchup.
Jon Chevreau: David, what does it mean to be a procrastinator? Why this book right now?
David Trahair: Sadly, the majority of Canadians are still nowhere near prepared for retirement. Some are poor with money and spend more than they make each year and therefore have nothing to save, but many of us can’t be blamed for not saving earlier. Life is so expensive: the mortgage, car loans, house repairs, utilities, food, raising the kids. Many have a tough time just paying off their credit cards each month. So out of necessity, they become procrastinators: not because they’re throwing money away but because life is so expensive. The book’s message is that with ten years to go, it’s not hopeless even though it’s been very difficult to date.
JC: You say you yourself are a procrastinator?
DT: Yes and it’s not because I’m fiscally irresponsible. I’m a cheap tightwad accountant! The problem is life is so costly in your 30s and 40s. I’m 57 now and both my wife and I are still working. We need two cars because we work in two different parts of the city. We have a house with a mortgage, and two kids who are in university or just graduating.
JC: Why are so many Canadians in this predicament? How many are there who have saved little or nothing for retirement, or worse, are still hopelessly mired in debt?
DT: According to the Canadian Bankers Association, 60% of Canadians pay off their credit cards every month and therefore don’t pay interest, but that means 40% can’t even pay them off. That’s astoundingly horrible news and indicates the need for more financial literacy. People need to figure out how bad being a credit card “revolver” is and what a terrible time retirement is going to be if they don’t get their act together.
JC: Most financial advisors stress saving as early in life as possible. Is there anyone who can afford to be a procrastinator?
DT: Perhaps those with Government or executive jobs offering Defined Benefit pensions and of course the minority of successful business owners and those who inherit wealth or win the lottery.
JC: Or perhaps very low-income senior couples who never saved, are used to being frugal and who can survive solely on Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)? I know a few who did that.
DT: I agree. It really depends on the situation. If you have a paid-off house you may not need much more than the government pension plans. But I’m trying to get to all the rest – those procrastinators who need additional savings—while there’s still time; 10 years left. Start saving so you’re not in the situation where you’re retired and it’s OAS and CPP and that’s it.
JC: Why is it so hard for procrastinators to play catchup?
DT: I think we’re in a low-return environment for the foreseeable future. Face it, very few people are going to be making 7 or 8% consistently after fees on their portfolios any more. That’s depressing but it’s the new reality. You used to be able to get rates like that on the equity portion of your portfolio but even generating 5% on your equities is going to be very difficult to achieve on a consistent basis after fees. The rule of thumb says you shouldn’t have more than 100 minus your age in equities; combine that with low interest rates and maybe we’ve got to plan on returns of 4 or 5% after fees. So those procrastinators who think a great rate of return is going to bail out their retirement plan could be in for a rude awakening.
JC: If rates are so low, aren’t quality dividend-paying stocks a valid alternative? I know in previous books and this one you prefer the safety of GICs to the risks of stocks.
DT: The book does argue that maybe simple GICs are all you need. I’m a big fan of them but only when they’re held in RRSPs, RRIFs or TFSAs due to the punitive taxation of interest if they’re held in regular investment accounts. Some argue GICs can’t match inflation but fixed-income products like GICs are actually quite good at fighting inflation because there is a correlation between interest rates and inflation. That’s because if inflation rises, the central banks will raise interest rates and they’ll do the reverse if it falls. As for stocks, significant exposure during retirement puts you at extreme financial risk. If you’re 65, that rule of thumb would allow only 35% of the portfolio to be allocated to the stock market.
JC: Let’s say you’re ten years out and not yet saved a dime. What’s the number one thing a procrastinator can do to save his or her retirement?
DT: What becomes more and more important is not so much a great rate of return to save your retirement plan but plain old hard work and discipline and trying to cut expenses so there is more money to put away. Assuming that people with ten years to go are in the highest income bracket they’ve ever been in, then RRSPs work brilliantly since they get a refund at a high marginal tax rate on the contribution and pay tax at a lower rate when they make the withdrawal. That’s going to be the case for most procrastinators with ten years or less to go; they will be in a low bracket when they retire on much less income. So it’s a no brainer.
JC: How do TFSAs fit in the mix?
DT: The Tax-free Savings Account is ideal for somebody like you who has maxed out the RRSP and paid off all consumer and mortgage debt. But for most procrastinators, RRSPs blow away TFSAs. And if you’ve maxed out on RRSPs and have consumer debt at 20% you’re way better off paying down debt than earning 3 or 4% in a TFSA. If you have a mortgage at 3.5%, you have to be pretty confident your TFSA can make an after-fee return of over 3 or 4%. If you can do that, the TFSA is the better option but paying off debt is a guarantee.
JC: What about non-saving seniors who plan to live only on CPP, OAS and GIS? I thought for them the TFSA is good because the RRSP and ultimately a RRIF is taxed.
DT: It may make sense to use a TFSA if you expect to receive GIS, but that makes sense anyway because their tax bracket is lower so the RRSP wouldn’t give them much bang for the buck. For higher income people, the OAS clawback starts at $72,809 in 2015; so wealthy people have to worry about it but the average Canadian can forget about OAS clawbacks; it won’t be a concern.
JC: It seems to me that procrastinators would be better off delaying retirement, aiming to retire somewhere between 65 and 70 rather than earlier. After all, both CPP and OAS pay more if you wait till 70, and if you are in a pension or have some investments, they’ll all grow more the longer you wait, plus you’ll shorten the drawdown period. Would you agree procrastinators should also delay retirement?
DT: Yes, if possible. Even a one-year delay can be a significant benefit but the problem is many people don’t have that option. They’re laid off in their late 50s or early 60s but had planned for 65. The other thing is your health. Maybe you can wait until 70 if you’re in an office job but anyone in trades or construction will probably be burned out before then. If you can, aim at working an extra couple of years from when you thought you would retire.
JC: So it sounds like for procrastinators, the sweet spot is around 65?
DT: Yes, that’s the general thinking for most people. The key to retirement planning is to track where the money is currently going. Discover when your spending declines and that’s the golden opportunity with ten years to go and you’re still working. Realize there is a surplus and do something positive with it; if people don’t do that I worry that they will spend it; don’t be like ‘oh great, things have loosened up, let’s go on more trips and vacations, buy more toys’. Then you’ll end up in retirement with what you say: CPP, OAS and little else.
JC: Given your views on debt, I doubt you advocate going into retirement with mortgage or even credit-card debt?
DT: The sad thing is the previous generation’s thinking was that going into retirement with a mortgage is a horrible thing to do but many of the current generation’s seniors don’t seem worried at all about going into retirement with a mortgage or even ugly consumer debt. I don’t see how that’s going to work.
JC: I’d argue a two-income couple can make RRSP contributions as well as pay down the mortgage.
DT: For sure and that’s a very good point. For couples, it’s a joint strategy. It doesn’t have to be all or nothing; maybe one year one of you makes an RRSP contribution and the other doesn’t and pays down debt instead, and switch the next year because as we know, the key strategy with RRSPs is to even them up, to have about the same value at retirement. So yes, it’s not all or nothing.
Jonathan Chevreau is the founder of the Financial Independence Hub and can be reached at firstname.lastname@example.org. His own co-authored retirement book, Victory Lap Retirement, will be published late in the summer.