There are three phases of
retirement and I have discussed them but here are a few things you’ll have to
pay attention to as you move to and through your stages of retirement:
Life expectancy.
The average life expectancy
for those reaching age 65 in Canada is increasing and is now 83.35 for men and 86.6 for
women. The better news is that about 33% of those 65 today will live past age
90. Your pensions and other resources might have to last a lot longer than your
grandfather's did.
Health care.
Just because we’re living
longer doesn’t mean we’re living healthier. According to the National Council
on Aging, about 80 percent of older adults have at least one chronic disease
and 68 percent have at least two. In our survey, nearly one in two seniors
reported living with two or more chronic conditions. Your retirement plan
should include ways to stay active in retirement — and a backup for any costs
that your Medicare doesn’t cover.
Long-term care.
The cost of long-term care
services can be very high: 24/7 assistance in an institution costs around
$60,000 per person per year in Canada. At present, the financing of long-term
care in Canada is a patchwork. Access to
long-term care and its cost to individuals vary depending on the region where
they live and whether they are still at home or in a residential facility.
In a study published in 2012
by the Institute for Research in Public Policy, t was found that relying on
private savings is not an efficient way for Canadians to provide for their potential
future care needs, since individuals are likely to save too much or too little.
On average individuals would
need to save the equivalent of $7,500 per year over a 40-year period, a total
of $300,000, to adequately prepare for their potential long-term care funding
needs (married couples could halve this amount). So, the private savings option
is not only not feasible for most, but it would also be a waste of resources,
because 80 percent of the population will end up not needing so much savings.
The risk of becoming
dependent on formal care for an extended period of time is concentrated among a relatively small segment of the population for whom the risk can reach
catastrophic levels in financial terms. For example, at age 65, only 20% of
individuals will require care for more than five years in their remaining
years.
Housing.
In BC 93% of seniors live
independently but may need assistance to stay in their homes, but we should
not rely on our homes as our retirement plan. In 2008 and 2009, many of us
learned the hard way what can happen if you put all your money into your home.
Those who bought in early 2006 watched their equity disappear within a year or
two as the housing market crashed. Some homeowners had time to recover, but in
retirement, you need a mix of assets that allow you to remain flexible, in case
you decide to downsize, renovate or relocate.
5. Market conditions.
We are in a time of negative
interest rates in Canada, the United States and Europe. Our central banks
appear to be following Japan’s example. This policy could be a problem for pension
plans. In addition, due to technology and our global economy, the market
changes constantly, and we’ve experienced an incredible amount of volatility.
If the market falls just
before or early in your retirement, your entire plan could be at risk. Remember,
if you lose 50% of your portfolio, you’ll need to earn 100% to get back to
even. In retirement, you’re also withdrawing money and you lose recovery time.
It’s important to regularly evaluate market conditions and income-distribution
strategies with your financial professional.
Canada Pension Plan, Old Age
Security (Social Security in the USA).
While pundits and politicians
debate the future of these programs, it’s up to you to determine when you
should claim your benefits. While most retirees still file before their full
retirement age, many advise delaying payments as long as possible to maximize
your benefits. Your adviser can help you decide what’s right for your plan. Factors
to consider include your family’s medical history and your own, whether you
have a pension or other guaranteed sources of income, and if you think you’ll
want or need the money while you’re the first stage of retirement and more
active then you will be in the second and third stages.
Taxes.
If, like many modern-day
pre-retirees, you’ve been socking all your money away in a tax-deferred
investment account or Registered Retirement Savings Plan, you could be looking
at a problem in retirement. Although most people expect to be in a lower tax
bracket when they stop working, that isn’t always the case.
Even if you’re usually in a
lower bracket, if you need extra funds for a vacation or some other major
purchase, the money you withdraw could temporarily bump you to a higher rate.
You’ll also have required minimum distributions to deal with when you turn the
magic age. In Canada that is 71 and, in the USA, it is 70.5. If tax rates go up
in the future, the problem will only get worse. You may want to consider
diversifying your savings into accounts that are taxed in different ways.
Inflation.
Inflation means the market is
growing and the economy is doing well. It also puts your purchasing power at
risk. One way to find out how is to use the rule of 72 to give you a rough estimate
of how inflation affects your spending. For example, if inflation is at 3%, I
divide 72 by 3 and I get 24. That means over a 24-year period my spending power
will decrease by 50%. If inflation is at 6% then when I divide 72 by 6, I get
12 years. This means that in 12 years what I could buy for $100 will cost me
$150.
So, it’s crucial to plan for
how inflation could affect your 20- to 30-year retirement. The options for
growing your money safely keep changing, so you’ll need up-to-date advice. What
worked for a different generation may not be the most lucrative or efficient
way to save or invest today.
Like the menu at the restaurant that changes over time, the strategies and products available to you
may not even have been conceived of back when your dad or granddad was
retiring. Your qualified financial professional can go over your options, see
which ones fit your needs and help design a custom — and current — retirement
plan
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