The
Financial Truth Behind Retirement
By
Jonathan Chevreau
Planning a comfortable retirement is the chief preoccupation of
millions of Canadian savers and financial planners. But the real
"holy grail" is early retirement, a goal that seems achievable
only by business owners, lottery winners and public servants.
While
the average government worker retires at the relatively early age
of 55, those in the public sector usually keep slogging to 65, says
pension expert Malcolm Hamilton at William M. Mercer.
I
recently shared the stage with Hamilton on a panel about retirement.
My presentation summarized several books published this year which
take quite different approaches on when you can retire early.
6
retirement secrets
Hamilton
himself has not written a book, despite being the country's pre-eminent
authority on retirement. He told the panel everything he knows about
what affluent Canadians need to know about retirement:
1.
Affluent Canadians should be able to get by on between 30% and 50%
of what they grossed during their working years.
2.
They should maximize contributions to pensions, RRSPs, and RESPs
for their kids.
3.
They should avoid non-registered savings and instead acquire vacation
properties or other enjoyable acquisitions the government hasn't
figured out how to tax yet.
4.
They should minimize debt, including mortgage debt.
5.
They should avoid fixed-income investments outside tax shelters.
6.
They should leave money to their children when they are young adults.
Those
people who retire tend to have no debt, no dependent children, some
savings, inexpensive hobbies and modest expectations, he said. Those
who retire early usually work for government, are savers and are
homeowners, have peaked in their careers, have a life away from
work and have friends who have retired or are about to do so.
Despite
the traditional advice that retired Canadians need between 70 and
100% of the income they enjoyed while working, Hamilton says a 45%
replacement should be more than enough, assuming that mortgages,
children and retirement savings are out of the picture.
Vancouver-based
financial planner and author, Diane McCurdy believes in replacing
100% of working income in retirement. Her book, "How Much is
Enough?", suggests $500,000 is a rock-bottom nest egg to provide
a modest retirement income.
The
$500,000 target would be for a frugal individual who has retired
all debts and can live comfortably on $30,000 a year. But for the
rest of us, a flat $1 million proposed by many advisors and writers
is likely a better target. Based on conservative returns of 6% a
year, $1 million would yield only a modest $60,000 a year, less
than the $68,000 the average working Canadian household lives on.
Dual-income couples accustomed to the good life may need $2-million
or even $3-million to finance a comfortable retirement.
Dianne
Nahirny, 41-year-old author of "Stop Working ...Start Living,"
describes how she retired five years ago. Even though she never
earned more than $25,000 in any one year, Nahirny retired at age
36. Because she has no debts, she has stripped her needs to a bare
minimum and lives on $800 a month. She lives in a paid-for house
in Hamilton and has a modest net worth of $300,000. She intends
to take advantage of government pensions such as Canada Pension
Plan, at age 60, and Old Age Security, at age 65. In the meantime,
she uses her RRSP as a tax-eliminating vehicle. When her income
exceeds the basic personal amount, she reduces taxable income to
zero by making enough RRSP contributions to fall below the tax-exemption
line. The rest of her contributions she carries forward to use in
years when her taxable income rises. The key step in her plan was
to buy a house and pay off the mortgage as fast as possible. Then,
with all debts cleared, build up RRSP and non-registered savings
to the point where one can live off the proceeds without employment
income.
When
it came to deciding on the precise moment of liberation, Nahirny
dispensed with financial projections and simply plunged into retirement
to find out first hand what it really costs.
A
similar philosophy is espoused in "Free Parking," a book
by former financial planner, Alan Dickson. The 49-year-old B.C.
native works about 20 hours a week.
His
philosophy is summarized on the book's bright yellow cover: "Earn
less -- Live More. An RRSP can kill your financial plan!" The
fact that those RRSPs will eventually be taxed is Dickson's assurance
that government programs like the Canada Pension Plan or Old Age
Security will indeed be around in old age. Like Nahirny, he plans
to collect reduced CPP benefits at age 60. He says those waiting
until 65 for full CPP benefits won't be able to make up for the
five deferred years until age 83.
As
a planner working with retirees and those saving for retirement,
Dickson began to question the prevailing wisdom of toiling until
you reach 65 to put aside a few million in an RRSP. However, that
doesn't mean he eschews the whole notion of planning for the future.
"It takes planning to work less, pay less tax, take more vacations
and retire early."
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