Clarifying Your Vision for Retirement
An Introduction to Retirement Planning – Part 4
Planning for retirement is not just about money. I think you could reasonably argue that money is almost the last thing to be considered. It is the tool that makes your plans for retirement executable. Mind you, it can also be, and very often is, the constraint that forces certain retirement planning choices upon you.
Beyond money, retirement means planning for life transitions, family issues, and health considerations among other things, and all of them come laden with emotions that are part of the path to retirement. Planning for retirement therefore includes thoughtful anticipation of how you imagine those years will play out.
Filling the Hours
When my dad retired from his regular job, he didn’t quit working. He worked part-time as a handyman at a retirement home, continued his association with the Kiwanis Club, which involved a lot of fundraising projects in my home town of Chilliwack, BC, continued curling at a very competitive level, and took on the job of treasurer at his church. His was not a boring retirement.
Retirement does not necessarily mean a life of leisure and constant travel, although it may approach that for some. Retirement also does not necessarily mean you are doing the same thing for the next 30 years. As there are stages in life generally, there are stages within retirement. In my previous post, I referred to three retirement stages: the Go-Go Years, the Go-Slow Years and the No-Go Years. If you think of a typical retirement beginning at age 65 and that you may live until 95, there is a 30-year period that divides neatly into three 10-year periods.
- Go-Go Years: 65 – 75
- Go-Slow Years: 75 – 85
- No-Go Years: 85 – 95
Of course, our lives will follow their own unique paths, but this segmentation is a helpful place to start. Financially, the Go-Go Years and the No-Go Years tend to be the more expensive periods of a retirement lifestyle. By the time the Go-Go Years arrive, many hope to have reached a degree of financial independence. These are the years when “filling the hours” with activity and travel is a sought-after ideal. (I am going to assume that medical science and public health policy will limit the impact of COVID-19 in the future, resulting in the resumption of some degree of travel.) Those hours are often expensive.
The No-Go Years have a different set of expenses. You may not be very active anymore, which decreases costs, but perhaps you will find it necessary to live in a retirement home or a nursing home. The former may be described as an independent living facility, but there are extra services that you require because it is becoming more difficult for you to manage on your own. For example, grocery shopping, cooking and keeping the house clean may be more than you want to tackle. And, if you require nursing home care, depending on the services you need or desire, you may have significant out-of-pocket expenses. Here, a decision made several years earlier over whether to have bought long-term care insurance may be significant.
In between, are the Go-Slow Years. Your energy levels and general health may be declining. Travel and other activities diminish and costs decline. Maybe you downsize out of your home, reducing household maintenance costs.
To be clear, the chart above is very simple and completely hypothetical. I assume a 30 percent drop in spending from the peaks at the beginning and end of the retirement period.
Making the Transition
When you are in your working years, retirement planning has to do mostly with investment planning. Am I contributing regularly to my RRSP and/or TFSA? Have I maximized the available retirement benefits from my employer? Do I have the right asset mix? As you near or enter retirement, the questions change: Can I maintain the lifestyle I want in retirement? Will I be able to receive a steady income? Do I have the supports in place to deal with my health issues? Will I have enough to leave an inheritance to my heirs or to provide for a charitable bequest in my will?
Don’t Forget Mental Health
For many, work is a major factor in our sense of self. It is not, “I teach at an elementary school.” Rather, it is, “I am an elementary school teacher.” The first describes what you do. The second describes who you are. When something you may have been doing for 30 or 40 years is no longer there, who are you anymore? There can be real psychological trauma in that transition if you have not prepared for it in advance. This is hardly a novel thing for me to encourage everyone, especially those nearing retirement, to develop friendships, activities and community connections that are not tied to your workplace.
Other traumatic events can arise and affect you to varying degrees. Although this typically happens well before retirement, depending on your family’s circumstances, the empty nest experience can have a major impact. Again, this is tied to identity. Who am I if my life no longer revolves around the needs of my children?
At the other end of the spectrum, what sort of trauma does one experience when a spouse falls ill and the healthy one of the couple becomes the caregiver? It is traumatic for both in different ways. All the plans and hopes for an active retirement together are replaced with a desire to care for a loved one, while the one who is feeling sick may feel like a burden. The natural extension of this trauma is the trauma of bereavement following the death of a loved one.
These concerns may seem way outside the realm of retirement planning, but they are most definitely not. Undesired events should still be anticipated, not least because they may have a financial impact on retirement.
Consider the impact of a spouse needing to enter a long-term care facility. I wrote about long-term care insurance in an earlier post. Long-term care may or may not be necessary, but insurance, or building a component of your retirement savings that takes the costs of long-term care into consideration, is an element of planning, no matter how much we might like to avoid the topic.
Another financial consideration has to do with how you are investing as you approach and enter retirement. On the one hand, with retirement potentially lasting for 30 years or more, there is plenty of time to invest in assets like equities, which have outperformed all other investments over the long term. On the other hand, imagine a scenario where you had planned to withdraw $40,000 from your investment portfolio to supplement your other sources of retirement income. Just as you planned to make your first withdrawals, your investments lost 30 percent of their value. Forty thousand dollars on a $1 million portfolio is 4 percent, but $40,000 on a $700,000 portfolio is over 5.7 percent. Do you have enough money to make it to your expected lifespan now, if you keep on withdrawing at the same rate? Caution, especially at the beginning of your retirement, is entirely appropriate, because you have less margin for error when you are drawing down your accumulated assets.
Assumptions are Unavoidable
Both you, the future retiree, and your financial planner, need to work with assumptions when working up a retirement plan. What do you anticipate your retirement lifestyle to be? When will you retire? Will you ease into retirement or retire “full-stop” when the time comes? What if your plans don’t work out? According to a 2018 article in The Globe and Mail, nearly half of Canadians were forced to retire earlier than they had planned. Assumptions therefore need to be held lightly and contingencies need to be considered. I am not aware of anything specific about this matter yet, but it could be that one of the consequences of the significant shutdown of Canada’s economy due to the COVID-19 pandemic will be a significant number of forced retirees who had anticipated that they would still be working.
How will you approach retirement?
Retirement can and does take a variety of shapes and will change throughout your years. I close this post with a few ideas of how retirement might look and some steps you can take to prepare:
How retirement might look:
- Defer retirement to a later date than the traditional 65
- Retire from your current career in order to start your own business
- Gradually ease into retirement by working part-time at first
- Defer retirement but switch into a new career more consistent with your interests
- Keep busy by volunteering for charitable causes
Some steps you can take
- Set broad goals and brainstorm plans to achieve them in all areas of your retirement life
- Talk over these goals and plans with family members
- Consider what you have “always wanted to do” and include in your plans ways in which you can accomplish some of them
- Consider experiences that will push you, at least a bit, beyond your comfort zone
In my next blog post I will discuss Estate Planning.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.