Chapter 8
The Best Third of Your Life
Finance and Retirement
There once was a time, not so long ago, when retirement was surely wasted on the old. Given a gold watch and packed off with a pension, people could expect to spend 5 to 15 years in retirement, mainly playing cards, adjusting their dentures, and waiting for infrequent visits from their grandchildren.
These days, 60 is the new 40. Over the past couple of generations, retirement has undergone a welcome makeover. Travel the world, pursue your favourite sports, take up a new career (or a new certain someone), all the while looking as hot as Helen Mirren (rocking a red bikini in Puglia, now that's inspiration!).
Healthier lifestyles and medical advances mean that we are all living longer (and women longer than men), and many of us are striving to retire at a younger age than our parents or grandparents. Indeed, these days, you can expect your retirement to last 30 years or more. If you retire at 60, there's a good chance you could live to age 90, making retirement a third of your life!
It boils down to this: you've got a whole lot of living—and spending—left to do! So how to live long and live well . . .
In theatre and screenwriting circles, much homage is paid to Aristotle's classic three-act structure. Aristotle was a clever guy; it's no accident that the three acts roughly parallel the way we live our lives.
Traditionally, the first act introduces the heroine and sets up her situation, much like finding yourself by the age of 30. The second act sees the main character pursuing her goals, such as mid-life career climb, marriage, and raising children, while conflicts and obstacles threaten to undermine her success (oh, you've had a few!). The third act (hello, Miss Sixty!) brings resolution: our heroine overcomes her obstacles to achieve her goals and lives happily ever after. (Or, in the case of tragedies, she does not meet her goals, suffers terribly, and the world at large learns a valuable lesson.) Hmmm . . . which would you prefer?
Whether your third act is a comedy, drama, or tragedy is totally up to you. It comes down to this: in retirement, there is not much that can't be improved with a healthy savings plan on which you can rely.
And rely, you must. Despite all those ads for Florida vacation rentals and bank mutual funds depicting lovely white-haired couples walking hand in hand into the sunset, research tells us that “retirement is very often lived alone, whether by choice, or as the result of divorce or the death of a spouse.”1 (We like to quote Jane Austen from her 1815 novel Emma, “a single woman, of good fortune, is always respectable”.)
Knowing you have enough savings and income to keep you well funded throughout your retirement alleviates day-to-day stress and allows you to make choices that will feed your soul and make you happy.
Of course, your golden nest egg will need time to grow; hence, the reason financial advisors are so adamant about getting you to start saving early, thus benefiting from the magic of compound interest. As our friend Warren Buffett once said, “Someone's sitting in the shade today because someone planted a tree a long time ago.”2
Well, we want to see you lounging under that shady tree (protecting your age-defying beauty from the sun's harmful rays, of course), so let's get planting!
Before we begin to discuss savings and income, it's worth spending a little more time on that shady tree. Many people get hung up on retirement's big brass ring without really grasping what it will mean for them day to day. Retirement in theory sounds blissful; retirement in practice can be a shock.
Now close your eyes (come on, work with us!). Imagine you have been retired for a full year, and you are sitting under a shady tree, feeling utter contentment. Consider:
What kind of tree are you sitting under? A palm tree on a beach in the Caribbean? A Douglas fir at your cottage? The maple tree in your backyard? A scotch pine on a snowy ski hill?
Imagine the sounds you hear: children laughing, music playing, or pristine silence?
Are you sweating from a workout or wrapped in a cozy blanket?
What do you smell? Sea air or steaming coffee?
Are you alone or is someone sitting with you?
What were you doing before you sat down under the tree?
What activities are waiting for you once you stand up?
What are you wearing?
How do you feel? Energized, relaxed, focused?
Use all of your senses to imagine your tree scene with as much detail as you can. Write down everything you've imagined. If you do the exercise again in a few months or a few years, compare notes to see how the circumstances of your image change.
Now, we don't mean to get all New Agey on you, but there is some reasoning and truth behind this exercise. The images that you visualize in your tree scene can give you important clues with respect to your needs and desires for your post-work lifestyle. Think:
How will you spend your time?
What routines and activities will keep you busy?
What plans or projects will you tackle?
How will your quality of life change: for the worse and for the better?
Because you see, where you choose to retire and what you plan to do when you get there will drastically change the way you structure your finances and your retirement plan.
Getting Started: Age-Appropriate Tips
Women are legendary planners. We like to plan. You may even have found yourself at some point making a plan to plan (“Let's meet for lunch and plan our vacation!”). This is an excellent trait—do not let anyone (ahem—husband, boyfriend, brother) tell you otherwise. When it comes to your retirement, you can never plan too far ahead or start saving too early.
Your age and your distance from the “big R” will naturally affect how aggressive your plans and tactics are in terms of savings and strategy. Consider these age-appropriate tips:
- In your 20s and 30s
When retirement is 20 or 30 years away, you can (and should) be stashing away funds, even though you may not have a clue yet how you intend to spend those golden years. (Heck, you may not even know how you want to spend this weekend!) It won't always be easy, but you have two very valuable things going for you at this point:
1. Compound interest, which can exponentially increase any drop-in-the-bucket funds you add.
2. A long investment horizon, which means you have the opportunity to invest in equities that may be on the higher end of the risk scale, but do have the potential for higher returns.
Your goal at this point of your life is to slowly but surely build wealth. Plant those seeds now!
- In your 40s
You may be facing some of your biggest savings challenges during these years. Between mortgages, cottages, and sending kids to school and university, your retirement savings can easily take a back seat. Yet these are the critical years when you must get serious about your retirement savings. This is your chance to make up for any lost time and replenish any savings you may have raided.
At this point, your vision of how you want to spend your retirement may be starting to take shape. You have a better idea of the lifestyle you will expect and the income that will be required to fund it. You may even have that villa under the Tuscan sun already picked out. This is good. It's much easier to save for something when you have an actual target in sight.
Your goal is to ensure that despite your other financial obligations, you are regularly contributing to your retirement funds. You still have 20 some years to go, so you can maintain an aggressive yet well-balanced investment portfolio.
- In your 50s
It's go time. You can see yourself on the deck chair already. You can almost taste the Brunello di Montalcino you plan to sip (during a little sojourn in Italy perhaps?). Whether you've decided to spend your retirement pursuing a dream second career or taking a permanent vacation, this is the point when you must meet with your financial advisor to make sure you are on track with your savings and to figure out a plan B if you're not as far ahead as you would like.
While a basic rule of thumb is to plan to have access to 70 per cent of your pre-retirement income upon retirement, an advisor can help you to determine a more specific retirement income level based on your actual expenses and projections of those expenses. Your goals now are to:
1. Aggressively ramp up the amount you're putting into savings.
2. Shift your investment strategy to a lower-risk wealth preservation mode.
3. Eliminate your debt (yes this includes your mortgage, if you can). Living on a fixed income is a whole lot easier without looming debt payments.
- In your 60s
Yippee! If you haven't already stepped over the threshold into retirement, you are likely poised to do so soon. We don't mean to rain on your parade, but managing your expenses, paying down debt, and even contributing to your savings are still concerns, perhaps now more than ever. You've got a good 30 years ahead of you (or more!), and despite your new seniors' discount card, the cost of health care, gas, food, and everything else is still rising. Your goals are to:
1. Make your money last.
2. Make your third act the best time of your life!
Hindsight
As an advisor, I've worked with many clients as they cross the threshold into retirement. Despite aggressively saving for many years (decades!) to reach that point, very few people stop and think about how they will feel about going from earning a paycheque every two weeks and an annual bonus to living off savings and government benefits.
Making the psychological shift to live off (and therefore spend) your hard-earned savings requires a huge change in mindset. Many new retirees have a difficult time with the idea of living off investment income or depleting their investment capital. Fear sets in—and sometimes panic—wondering whether it will be enough. How can it possibly be enough?
Just as a pre-retirement client requires a plan for accumulating her savings, a plan for managing your retirement income is equally critical. This will give you a blueprint to see and understand all of the sources of income you will have access to and guidance for how best to draw upon these sources over time, in order to generate the highest after-tax income possible.
It's amazing how many people overlook this step and wander into their retirement years quite blindly. Bottom line: if your financial advisor has not suggested helping you design a retirement income plan, make sure you request one.
Turbocharge Your Registered Retirement Plan
With their potent combination of tax deductions and tax-deferred compound growth, registered plans are the financial equivalent of an anti-aging wrinkle cream: essential for women of a “certain age.” Here are a few ways that smart women get more out of their registered savings plans:
- Do it now, do it often
Amateurs contribute to their savings plans annually. You, savvy investor, will make monthly or biweekly contributions, right out of your paycheque. This will create more opportunity for compound interest to do its magic multiple thing.
- Max it out
Governments provide annual limits as to how much you can put into a registered plan and they typically increase each year. If you add just $30 extra each week (a night out at the movies!), this will add up to more than $1,500 a year.
- The virtuous refund cycle
Contributions to registered plans are tax deductable, so if you contribute as much as you can, there's a good chance you will receive a tax refund. Take that refund and put it into your registered plan and, thereby, earn yourself another refund . . . and a nicely growing nest egg. Consider that an extra $500 invested every year for 30 years, earning 6 per cent annually, will add up to $41,900 to your retirement fund. Nice saving, lady!
- Go for growth
When you have a long investment horizon, growth stocks give you a better chance at a bigger return. There is typically more risk of volatility with growth stocks, but the advantage of staying invested longer means that those bumps tend to even out in the long term.
Golden Rule: A Word on the Cost of Living
No matter where you live, health care and housing costs are likely to go up. Government revenues can't seem to keep up with health-care budgets, particularly as the aging baby boomer demographic moves through the system. Don't expect any cost breaks for either your health or your home. Calculate a cost of living increase into your retirement income plan.
- “My kids are my retirement plan.”
We've actually heard of people who rationalize having three or more kids (and the expenses that come with it) by assuming that at least one offspring will be über-successful (and therefore make up for the lack of saving Mom and Dad did in raising the giant brood). Hello! Very bad idea!
Your kids (like your man) should never be your retirement plan, even if you are convinced little Jack is going to be a hockey star or little Ella will be a brain surgeon. Furthermore, you simply can't afford to sacrifice your own retirement money for the sake of funding everything for your children, particularly your adult children.
If you can't afford to pay for their full college tuition while also contributing to your retirement savings, pay yourself first and then help your kids find ways to supplement their school costs through scholarships, loans, and summer jobs. They will appreciate this later when taking you out for lunch in your old age is not a burden . . . it's a pleasure.
- “My husband is my retirement plan.”
Unfortunately, your loving hubby won't be around forever. Statistically speaking, there's a good chance you will outlive him. Are you sufficiently protected financially? Adequate life insurance can help defray any debts and taxes on his estate, but you must also ensure that any assets will be smoothly transferred to you in order to reduce those nasty taxes. Your husband's pension plan will also likely provide for a beneficiary entitlement, though take heed: the extra income from that will fall solely on your tax shoulders.
- “My house is my retirement plan.”
For the past few decades, many people have invested heavily in real estate, expecting that the markets and their home values would rise forever. When it comes time to retire, they would sell their home, downsize to more modest digs, and live off the difference. If you are one of these people, with all your retirement eggs in the home basket, we'd like to give you a few points to ponder, just to make sure you are prepared:
- Beware of being at the mercy of the markets
As we saw in 2008 and 2009, real-estate markets are not immune to falling. There is no guarantee that when you are ready to sell your house, the market will be on an upswing.
- Watch your weight(ings)
If, in addition to your primary home, you are invested in other properties, such as vacation homes, commercial property, or shares in a real-estate investment trust, you may be even more vulnerable to market swings and it would be wise to balance your portfolio with other asset classes.
- Believe in equities
Investors often think of real estate as safe, dependable, and always increasing in value. Yet, historical data has proven that over the long term, the stock market has provided better average annual compound returns than any other asset class, including real estate.
- Selling takes time
Real estate is not a liquid investment. Even if you want to sell your home fast and need the funds in a hurry, real estate will take its sweet time. You will need to prepare the property for sale, list it, and wait for closing.
- Selling costs money
Just as there is no quick way to get out of real estate, there is no cheap way either. Agent commissions, legal fees, land-transfer taxes, and moving costs will all eat into your sale profits, not to mention the cost of doing any upgrades prior to listing for sale.
- Sideways sizing
Quite often, people intend to downsize their home in order to save costs, yet end up buying a smaller, but swankier condo with high strata fees that offset any savings from home maintenance or gardening. Do the math to ensure that you are downsizing your costs (and not merely your square footage!).
Did You Know? Put It in Reverse!
As you approach retirement, you will likely become acquainted with the term reverse mortgage. This option is highly appealing for many retirees looking for a way to increase their cash flow by using the equity that is stored in their home, without actually selling the house. How does this work?
- A reverse mortgage is a loan against your home that you don't have to pay back until you sell the house.
- The loan will be based on the value of your home.
- There are no monthly payments. Interest on the loan will be added to the principal you owe.
- You can use the loan as cash flow or to finance the purchase of other real estate, such as a vacation property.
- Lending rates and fees may be higher than other mortgages or regular loans.
- By using the equity in your home now, you will deplete the value when it is one day sold—something to think about for your estate plan.
Show Me the Money: Where Do I Get My Retirement Income?
One fine day, you will wake up, yawn, stretch your arms, smile to the world, and announce, “Today, I am retired!” Awesome. Then what? Where will the money come from to pay for your golfing lessons and your Diane Von Furstenberg beach kaftans?
If you're like most people, your retirement income will be gleaned from a variety of sources: government pensions, company pensions, and your own savings. Let's consider these sources:
- Government pensions
If you have worked full-time, you and your employer paid premiums into a government pension plan (deducted from your paycheques). Upon application, you will receive payments representing a fraction of what you paid into the system. Many governments also provide modest age-based pensions and other top-up benefits that are calculated based on your overall income.
- Company pensions
While you were working, you likely paid into a company pension plan, also through premiums on your paycheque. If you have a defined benefit pension plan, the calculation of your payments will depend on how many years you worked for the company and your salary. If you have a defined contribution pension plan, your income will be based on the performance of the funds you and your employer paid into the plan.
- Registered retirement savings
Known in the United States as 401Ks and in Canada as RRSPs, these are personal savings accounts that provide tax sheltering for the purposes of saving for one's own retirement. Within a registered plan, you may hold a variety of financial investments such as stocks, bonds, GICs, mutual funds, ETFs, and other securities.
- Non-registered savings
These correspond to any other savings or investment accounts you have that are not registered with the government as tax-efficient retirement savings vehicles. Many people choose to hold investments that are inherently tax efficient (for example, dividend-generating funds) outside of a registered plan, while using their registered plan for investments that would otherwise trigger capital gains and other investment income taxes.
Save Money, Reduce Taxes
In Canada, it is wise to consider maxing out your yearly tax-free savings account (TFSA), approximately $5,000 per year, indexed to inflation.
In a regular non-registered account, typically every dollar of investment income (i.e., interest, dividends) is taxed, as are your capital gains. What this basically means is that you have to earn more than a dollar to get a dollar (how much more will depend on your tax bracket).
In an RRSP, you get a tax break up front, but once you start withdrawals . . . oops! Then comes the taxing part, literally. With the TFSA, on the other hand, you don't pay tax on the growth of your investments. As in, you make a dollar and you get to keep that whole dollar.
Better still, you don't just have to let your money sit there. This is about much more than the savings in the name would suggest; rather, think about its earnings (a.k.a., growth) potential, including the possibility of investing your TFSA funds in:
- mutual funds;
- money-market funds;
- cash deposits;
- GICs;
- publicly traded securities; or
- government and corporate bonds.
Indeed, it pays to talk to your advisor or bank representative about opening a TFSA and seeing how you can take advantage of this very appealing investment vehicle for your savings needs. Tax-free—we love the sound of that!
Life Lesson: Swinging Single in Retirement
Without the ability to income split, being single can be costly. Plan carefully, since any retirement income you receive will need to be reported solely on your own tax return, rather than split with a spouse. If you hit a certain income ceiling, you may lose eligibility for some government benefits and end up paying higher taxes to boot.
Widows who receive their spouses' registered funds don't pay taxes on the transfer, but are fully responsible for paying the taxes on any income that follows. Your portion of your spouse's pension plan benefits will also raise your income and trigger more taxes. From a financial perspective, the death of a husband doesn't cut the expenses in half; however, when there is only one person to claim the income, the effect can be close to cutting that income in half.
Single retirees sometimes choose to share accommodations in order to live comfortably in a larger property or in an area that suits their lifestyle (hello Blanche, Sophia, Rose, and Dorothy!). If you do buy a house with someone, make sure you have a legal agreement in place that addresses ownership transfer if one person dies, remarries, or for whatever reason wants out of the arrangement.
What If I Don't Have Enough to Retire?
You've scrimped and saved. You've met with your financial advisor. You've done all the calculations. No matter which way you look at it, the ends are refusing to meet. Your plan to spend your golden years yachting around the Mediterranean is looking more like a canoe trip on the Great Lakes (bathtub paddling, anyone?). What do you do?
The way we see it, you've got five options to offset a shortfall in your income projection:
1. Delay retirement
One choice is to retire later, or phase into retirement by working part-time or taking a self-employed or contract position, perhaps with your former employer.
2. Downsize
Reduce your expenses and consider downsizing your home. Before undertaking this, however, do the math on the cost of staying versus all of the costs that come with selling, buying, and moving.
3. Reverse mortgage
Consider using a reverse mortgage to increase your retirement cash flow.
4. Change your expectations
You may find that there are some things on your wish list that you are willing to give up in order to be able to live comfortably and without stress.
5. Super save
Depending on your time frame, you can increase your nest egg by saving more or increasing investment risk to boost returns. Both of these tactics require the benefit of time to be successful, so the closer you are to retirement, the less feasible they will be.
When Control Isn't Cool: Elder Abuse
Women, who typically live longer and end up alone, can be particularly vulnerable to elder abuse, particularly when it comes to their finances. Sadly, this type of behaviour may come from family members, who may be facing their own financial challenges, or for whatever reason, feel that they are entitled to exert this type of power.
If you or a family member is being subjected to financial abuse, seek assistance to resolve the situation immediately. Part of the benefit of having your own network of advisors is the access to assistance and support in times of trouble. Seek assistance from your lawyer, investment advisor, or other key advisors to resolve the matter, and don't hesitate to contact the authorities if you believe a crime has been committed.
Above all else, take care of yourself. These situations can understandably be traumatic, so put aside the embarrassment and guilt you might feel (this is not your fault) and lean on those who love you. They (and you) will be glad you did.
Workin' It: Post-Retirement Careers
The thing about work is that when you have to get up in the morning and go to your job, it feels suspiciously like . . . work. Once you are retired, however, and freed from the shackles of daily employment, you might hear yourself offering to “help out” at the designer-clothing boutique where you usually shop. Or you might look at your beautiful, rambling old home and think, “I could turn this into a B&B!” You get the picture.
You may be surprised at how much you miss your former colleagues and the sense of purpose you gained from your career. You may find yourself lunching with former colleagues, staying on top of industry news, and offering to advise friends with their projects and business plans.
Retirement can have the effect of renewing your passion for work, whether it's the same kind of work you've built your career on or exploring a field that is completely new to you. When it's no longer a chore, you start to look upon your professional capabilities and the possibilities of work in a whole new way.
We know of women who spent their whole lives working to make ends meet and save for retirement, only to find that the hobby or passion they pursued during their retirement led to starting a business and earning even more money than they did before retirement.
Think of it this way: the first stage of your retirement can act as a sabbatical. You know, time to reflect on the work you've done, your achievements, and what your logical (or completely illogical) next steps might be. And once you've had a chance to reflect, just do it!
Golden Rule: Extra Income
Be aware that any extra income you earn will affect your ability to collect certain government-sponsored retirement benefits. You will have to review your tax situation and your registered plan details. In addition, when returning to work, consider how you wish to be employed, as an employee or as an independent contractor—and the tax advantages and disadvantages of each. In short, speak to your financial advisor about the implications of pursuing a new career; he or she can help you to structure your finances to your best advantage.
While you're kicking back under that shady tree, enjoying your glorious retirement, we just want to remind you of a few affairs you need to have in order during your third act of life.
Getting your estate in order is like cleaning out your closets. You avoid doing it as long as possible, but once you dedicate the time and just get it done, you feel a thousand times better (and wonder why it took you so long to get it organized in the first place)!
The purpose of an estate plan is to provide financial security for your family. It also creates a legacy for you to leave behind, ensuring that your wishes and directions are carried out when it comes to the distribution of your assets and the care of your loved ones.
Here are the important areas to cover when updating your estate plan:
- Your will
This is your opportunity to be clear about your intentions when you die. If you aren't, you may create disharmony among your surviving family members, as well as leave the process in the time-consuming hands of the courts to determine.
Assets may be transferred between spouses without tax consequences, but when the second spouse dies, deferred taxes (such as those on capital gains and registered plans) will have to be paid by the heirs. These expenses can significantly reduce the value of your estate. If your heirs will not immediately require the capital from your estate, a will allows some important tax-planning opportunities, such as creating trusts within the will.
- Your life insurance
The best way to offset the costs of taxes and debts owing to your estate is by ensuring your life insurance is sufficient. Think ahead: if you predecease your spouse, would they need extra financial help to hire a caregiver or handle the burden of mortgage payments and maintenance costs? Factor these items into your life-insurance equation.
- Your living will
Depending where you live, this may be referred to as a “power of attorney for personal care” or an “advanced health-care directive.” This document deals with the personal and health-care decisions that need to be made in case you become incapacitated. Here you will outline your instructions, such as how to handle life-saving measures, organ donation, and ongoing care. A living will is important to help family members understand your wishes in critical situations and can reduce stress and strain in the most difficult of times.
- Your executor
An executor, estate trustee, or liquidator is responsible for carrying out the terms of your will and settling your estate. Often a trusted professional advisor or a family member with legal or accounting expertise can be a good choice. Immediate family members, such as your spouse or children, need time to grieve and may be too emotionally concerned to handle the great amount of work and attention to detail required for this role.
- Your guardian
If you have young kids, naming someone to look after their care is probably your greatest concern. Not only are you entrusting a legal guardian with the moral responsibility of raising your kids, you are also asking for major time and financial commitments. You may wish to secure a separate life-insurance policy or establish a trust account, which can be directed specifically to the care and education of your children.
- Your philanthropy
You may wish to have part or all of your estate transferred to a charitable cause or structured as a foundation, which can disperse assets to various charities over time. You will need to appoint an administrator responsible for overseeing the appropriate disbursement of these funds.
The Takeaway
Your spouse's and your wills, bequests, insurance policies, and trust arrangements are all key elements of your overall plan. With professional advice, you can design a complete estate plan that reflects your values and meets your goals.
Golden Rule: Share Your Plans
Talking through your plans with your spouse and family members will alleviate any surprises and help you to grant any specific wishes they may have with regard to your estate. Make sure your loved ones know about the documents in your estate plan and where to find them. You can provide them with copies for safekeeping and inform them of how to contact your lawyer who will keep copies on file for you.
And with that in place, you're done; you've laid the foundation. It's now time to work it, honey! Your retirement, that is . . .
Notes
1. BMO Retirement Institute, “Divergent Paths to Retirement: How Men and Women Plan Differently,” BMO Financial Group, April 2011, http://www.bmo.com/pdf/mf/prospectus/en/11-558_Retirement_Report_April_E.pdf
2. James O'Loughlin, The Real Warren Buffett: Managing Capital, Leading People (Boston, MA: Nicholas Brealey, 2004).