Retirement Myths Debunked continued.
Myth #5 - You need 70 to 85 percent of your current income level in retirement.
A growing number of analysts on retirement income and spending patterns have found that most people will be fine if they target 50% of their pre-retirement earnings. Statistics Canada has many years of supporting data on this.
The focus should be on consumption dollars, what you spend on yourselves and your own lifestyle. For most Canadians, that excludes mortgage payments, child rearing costs and saving for retirement – things you wouldn’t necessarily be spending money on during retirement.
You will need 100% of your consumption dollars and some extra money in the early, active years of retirement for those special trips and experiences you have dreamed about for years. Your actual replacement income goal will depend on your marital status, whether you own a home, have children and how much money you earn, and can range from 40 to 60 percent.
Working with an advisor who understands the intricacies of retirement income planning can prove greatly beneficial in order to calculate what you need and what you want to do throughout the various phases of your retirement.
Myth #6 - You need that initial level of retirement income, indexed for the rest of your life.
I’m sure you can come up with a list of things that don’t fit the “set it and forget it” philosophy. Set the cruise control and forget it; set the room temperature and forget it; invest in a certain investment that has a particular risk associated with it and forget it. You need to make adjustments as your situation needs and priorities change. Retirement income planning works like that.
Retirement isn’t one long vacation. It represents the longest set of phases in your life, each with different cash flow needs.
You will need more money in your early, active years but you will eventually settle into a more normal retirement phase where expenses drop. Later in life, the loss of your spouse or partner and losing your driver’s license may cause you to spend even less money, however, a decline in health can increase costs beyond any reductions in other areas.
You may require money for long term care needs, such a caregiver or nurse, medications, home care equipment and even a retirement home. Hopefully you planned for these expenses in other areas of your financial plan, for example with long term care insurance, however, if you haven’t, these expenses may have to come out of your income. This is just one example where the expertise of a professional financial planner becomes vital as mistakes can have significant impacts later in your life.
Retirement and financial plans should be reviewed yearly so adjustments can be made in response to any changes in your circumstances. Life and your needs for income will change, so it is important to structure your investments to provide an income stream that is flexible and adaptable.
Myth # 7 - The government will take care of medical expenses
At the risk of sounding cynical, governments don’t pay for anything. Working Canadians, the taxpayers do. Taxes are directed to certain areas of need. Growing needs and rising costs means there isn’t enough public money to go around. This reality is hitting retirees and will continue to hit them harder as time goes on.
Our rapidly aging society is backing governments into a corner and forcing our leaders to make tough decisions on health care. It seems that there are already too many elderly people to care for with existing programs and funding. Absolute costs are going up while services are being cut back. Get used to it. You are going to have to channel more income into paying for uncovered services or eat into your long-term savings to take care of yourself and your aging family.
Our society is moving quickly from child care issues to elder care issues, and the latter issue is much more expensive and long lasting. The movement now is pushing care out into the community. That sounds good and has some merits, but long-term care is not free. Much of it is provided by family and that means it’s voluntary. It will likely be a large sacrifice of energy, time out of the workforce and hits to the retirement savings plans of caregivers as the government is not picking up the tab.
Myth #8 - I can deal with a shortfall in retirement savings by working longer or taking up some part time work.
Recent studies have found that almost half of retirees left the workforce earlier than planned. Downsizing, layoffs and negative working conditions were some of the reasons cited, however the biggest reason was health related - either the worker’s or someone in the family.
According to 2012 AARP data, people over 55 had an average of over 13 months on unemployment, which was almost 5 months longer than those under 55 looking for a job. Re-entering the workforce after retirement or finding a job after a layoff can be a significant challenge. It could take a long time to find an appropriate job, or you may be forced to take a minimum wage job out of necessity.
Working longer is not an option you can definitely count on because staying on the job or getting another job is not a given. Retirement can last decades and it is vital to start planning early for such a long period of time. Even if you are later in life and have not created a plan, it is better late than never. Almost two thirds of retired Canadians had less than a year to plan and adjust for such a significant period of their lives.
The Bottom Line
Be proactive when planning your retirement and remember: the earlier you start, the better! Healthy retirement planning will help ensure a more successful and happy retirement. Contact a Wealth Stewards Counsellor today and we will be happy to assist you.