The Unexplained In Planning For Retirement

What Is Planning For Retirement?

An RBC (Royal Bank of Canada) study reports that only 52% of Canadian boomers actually put a plan on paper despite understanding it’s importance.

For many Canadians a sense of futility comes from thinking “I’ll never be able to save enough money.”  They might be influenced by the old rule of thumb that suggests 70% of pre-retirement income is needed to maintain a current standard of living.

Fred Vettese and Rona Birenbaum in the Financial Post newspaper said that “If you take into account that spending habits are very different before and after retirement for most people we think 70% is vastly overstated.” They explain their viewpoint by saying, “If one has sufficient income, regular consumption- food, shelter, transportation, entertainment, home maintenance, insurance, etc.” should remain about the same after retirement.  However, the “investments”; buying a home, paying off the mortgage, going to work everyday and savings for retirement itself tend to go away. This is a critical piece of information, often missing from financial planning exercises. 

It means your retirement income target should be the percentage of your total pre-retirement pay allocated to regular consumption not the entire pre-retirement pay as many calculate.

Question- Are My Government Pensions and Dollar Based “Investments” all mine to keep?

In this area I think that we need some financial literacy programs for Canadians to explain whats really going on regarding their entitlements to Government Pensions and any “Investments” they might have saved for retirement.

In my own personal experience I have a friend, Maxine who at 75 Plus is still working at a full-time permanent job.  Unfortunately, she is also receiving the full the full Canadian CPP (Canada Pension Plan) and OAS (Old Age Security) pension benefits.  I say unfortunately because Maxine also experiences a significant claw-back to her Government OAS pension income in addition to losing the Age amount Federal and Provincial non-refundable tax credits.  

At the same time Maxine has significant dollar based “Investments” that incur annual $5,000 plus Investment fees resulting in badly dented retirement funds.  Like Maxine, many Canadians holding “Investments” pay hundreds of millions in investment fees and embedded adviser compensation each year.  These costs are coming under increasing scrutiny given the very small investment returns and growing concerns over ethics in the financial services industry.

Retirement Rescue Plan

In my new book , Encore! Encore! Seniors (50 plus) as Entrepreneurs: Their Time Has Come I say that In America, only 35% of households headed by someone age 75 or older owns any stock at all, compared to 63% of households headed by people between 55 and 64.  It’s not surprising that those aged 50 to 70 are the most likely to be hastily rewriting their retirement plans.  They own more equities and may also have been counting on shrinking home equity as a backstop in retirement.

“The recently retired are the most nervous group, but the pre-retirees are beginning to realize that in many cases retirement plans need to change,” says Timothy Wyman, a partner with the Center for Financial Planning in Southfield, Michigan.

Financial planners generally advise retirees to work longer due to “Investments” in a current meltdown.  But working longer as an employee basically benifits financial planners through increased investment fees & commisions, and penalizes workers by a claw-back of Government sourced pensions.

Financial planners also advise to conserve your cash- particularly if you are fully or partly retired and can’t ramp up earnings.

New Age Retirement Plan

In essence, the limiting belief by most Financial planners which is concentrating only on savings motivates one of my central beliefs and that is ‘retirement lifestyle’ should also be considered an important factor in determining retirement planning especially for Seniors 50 Plus.  What retirees want to do will necessarily determine the increasing or decreasing of the quality of life throughout their retirement.  Money or savings may not be the primary objective.  Some senior activities might be volunteering, or maybe setting up a home-based small business or even engaging  in social entrepreneurship activities.   As a result, some consideration for ‘retirement lifestyle’ would form the basis of planning for retirement in addition to strictly savings; and retirees would have ‘other options’ for becoming more active, creative, productive and more prosperous in their retirement life.

Besides having the chance to write off business related expenses (not available if you are working as an employee) by setting up a small home-based business, there is also the possibility of producing a significant profit margin based on your own efforts.  Even the worst case scenario i.e producing a net loss in your business has some limited benefits.  You can incur small business loses up to 3 annual years.  These annual loses can be used to shelter any ‘other’ taxable income that you might have during those same years.   On the other hand, net profits could provide enough additional monetary resources to supplement your meager Government pensions.  And, as a result the increased quality of life  could switch the retirees focus from entitlements to a successful new lifestyle which would necessarily change the planning for a new retirement.

There is a well respected senior’s advocate, Jane Bryant Quinn, AARP that poses an intersting quesion on this same topic which is as follows:

Can You Really Trust a Financial Adviser?

It’s the hardest question to answer in personal finance.

There’s a world of self-serving advisers out there, laser-focused on getting a piece of your retirement savings.  Jane Bryant Quinn says, “Trust no one,” but that’s not practical when your trying to manage money to last for life.”

Furthermore, Jane explains that the better approach is understand where your advisor’s self-interest lies and ask yourself whether you can work around it.  Surprisingly, the biggest hurdle you might have to overcome is your own polite tendency not to contradict what your adviser says. You might even agree to invest in something you suspect is not altogether good.  Yet, as studies consistently show, many advisers will give poor advice in order to earn more for themselves.

Finally, Sunita Sah, assistant prof. of business ethics @ Georgetown University in Washington, D.C. in a study introduced the term the ‘Panhandler’ effect.  Sunita explains that some combination of social pressure, desire to cooperate and awareness that the adviser is asking for a favor (the “panhandle”) can lead us to make a decision that’s against our own financial interests.

We don’t want advisers to think we’re mistrustful, so we agree, sometimes reluctantly, to what they want.  In the end it’s still our money.  One way to protect youself is to work with advisers who charge only fees, not sales commisions.  Self-study and setting up a self-directed financial plan is another way to become more independent in your financial life.

Joe W.