There’s an adage that goes 30 is the new 20. Another version of this saying is that 50 is the new 30. The phrase is meant to denote the value of wisdom one attains at an age while preserving the fountain of youth, but one must view it from a fiscal and economic lens. At 50, you’re going to have to work like you did in your 30s. Another decade of work is not going to cut it to accumulate the funds needed before reaching retirement age and living out your golden years.
The new retirement age
At 65 Canadians usually consider putting down the proverbial badge and retiring. Today, many young Canadians think that there is no longer a hard-stop retirement age. Many young Canadians have integrated their avocations as a part of their day-to-day living. Gone are the notions of 9 to 5 from 20 to 65. Activities reserved to be pursued in the last one or two decades of life are being pursued right now. Hence, the motivation to retire at a certain age has gone. Additionally, medical advancements along with a little SPF make millennials feel younger than their Gen X counterparts did at the same age. Millennials have pushed their lives a bit further down. The milestones in the 20s are being achieved in the 30s, thus, pushing down the retirement age.
While these reasons are more voluntary, there are financial reasons behind delayed retirement. Canadians have been grappling with a massive rise in the cost of living. The rate of inflation has been higher than the average salary and income growth and has eaten into savings. Savings which could have probably been kept away for home buying or retirement. Inflation removes predictability in budgeting and thus retirement planning. Better life expectancy has further extended the duration of the retired life. Together, this has hurt the prospects of having a financially secure retired life. Thus, this new outlook may be brought about more so because one has no other choice other than psychological factors like how young one feels.
The macroeconomic crisis of a retiring population
Everyone may not be in tune with the “forever young” line of thinking. Last year saw widespread protests in France over the government’s plan to increase the retirement age. The thing is, with increasing longevity of life, global pension systems need more money to pay for extended retirements. For the developed world there’s a double whammy. People paying into these pension systems or the working population is reducing. This is causing higher outflows than inflows. The UN expects one in six people to be 65 or older by 2050. This is why many governments are overhauling their pension schemes.
Can Canada afford to pay pension?
Canada is no stranger to the phenomenon of an aging population, as more and more reach the Canadian retirement age of 65. As a way to slow the pace of population ageing, the Canadian government has introduced immigration programmes to add to the working population. This has enabled the government to afford the support needed for retired individuals. This has not been without controversy though. Many attribute the rise in the cost of living and housing to the increasing number of immigrants.
Canada has also tweaked its pension structure to adapt to the changing retirement ecosystem. This has caused an increase in people aged 60-70 years old who are choosing to work longer. There’s an incentive structure for those opting to delay the receipt of their Canada Pension Plan benefits and Old Age Security benefits. If Canadians start receiving their pension later, they’ll receive a larger monthly amount. What’s more, if they choose to start collecting CPP before the age of 65, payouts will actually decrease by 0.6% each month. Some provinces have done away with mandatory retirement age policies.
Further, the establishment of the CPPIB or the Canada Pension Plan Investment Board has boosted funds for the plan.
Planning retirement
Higher cost of living and longer life expectancy means the retirement blueprint has to be reassessed. You must start with the amount needed to sustain your current lifestyle post-retirement. This will mean considering your annual salary or income. If you’re an hourly worker you must use the hourly to salary calculators which will give you a holistic picture of your income. Consider your expenses, pension benefits and inflation around the time of your retirement.
Of course, the question arises, how much do you need to retire in Canada? For that, consider your retirement age, aspirations, and family dynamic to be supported. Also, take into account any debts that you may still have left. Compare your current lifestyle with what it could look like post-retirement. You may consider moving to a smaller town, away from work where living expenses may be a little lower.
Inflation must be considered when assessing retirement. The good thing is that public pensions like OAS and CPP are indexed to inflation. If the cost of living goes up the value of retirement benefits goes up too. Individuals working in the public sector or in public service get added benefits.
The Canadian Retirement Income Calculator will help you assess how much you will need when you retire.
Saving and investing for retirement
Earn for longer, saving more and drawing less is a win-win solution for governments and individuals. For individuals looking to retire at 65, it’s essential to start saving and investing early. Even $100 saved every month and invested can help create a decent retirement corpus.
Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are great investment and tax-saving products that help not only grow your retirement corpus but also provide tax benefits. RRSP contributions help reduce the tax liability of individuals. With the TFSA you can set aside money for a goal and not pay taxes on the interest or investment income you earn.
For self-employed, RRSP and TFSA are a good starting point. Entrepreneurs don’t have support from the employer for pension contributions.
Final thoughts
Financial Independence, Retire Early or FIRE is a notion that appeals to a large section of society. Planning for that needs to start early on. It provides you with financial security,and leaves you less vulnerable to external factors like inflation or change in government policies. It also empowers you to make the decision on whether you want to work beyond 65 or call it quits before that.
