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The new retirement for baby-boomers

Thursday, June 10, 2010

For many years, we have all read how important baby boomers (born between 1946 and 1964) have been and how the purchasing patterns of that group are the major driver of the economy. That continues to be true. What is also true is that this group will have some unique challenges in retirement that previous generations didn’t have.

Longer retirement

Previous generations worked from about 20 to 65 (45 years), retired, and had a life expectancy of 72. Retirement income had to last an average of only seven years, and more companies offered high-end defined benefit pension plans.

These days you might not start working in a career until you’re 23.You may plan to work until age 55 (32 years) and then perhaps consult or work part- time. You are likely to live to age 80, or if married, the odds are very good that one will live to 90. In this scenario, work is reduced by 10 or more years, and retirement funds must last at least 10 years longer (on average) than previous generations.

This obviously has huge implications for people who like the idea of working less and playing more. The million dollar question is, “Will my retirement funds be able to handle this?” For many, the answer will be no.

If you have a defined benefit pension plan, your task is much easier, because this group has an unfair advantage over the rest of taxpayers who support this system. If you don’t have a defined benefit pension plan and hope to achieve early retirement, you will need to maximize RRSPs, TFSAs, and put money aside in non-registered plans. An inheritance could also help you achieve your goal.

The majority of people will be forced to work longer or work part-time to help limit the erosion of retirement capital.

High living standards

The baby boomers have lived a much more luxurious lifestyle than their parents did and plan to keep this up into retirement. Because of relaxed credit conditions, many will retire with debt. Our parents’ generation for the most part went into retirement debt-free, which made retirement planning (and living) much easier. Debt and the associated servicing costs are subject to rising interest rates. If your budget is tight, higher interest rates will mean a slightly lower standard of living.

If you become accustomed to managing a credit line during your working years, you may carry this practice into retirement, which is dangerous. Living within your means is more critical in retirement, because there are no pay raises or promotions in retirement to help you out of a jam. And there is no longer any potential for lucrative employment “settlements” or “retiring allowances” to clear debt or to top up registered plans.

Dealing with elderly parents

With life expectancy around 72, the majority of pre-baby boomer parents didn’t need to plan for funding parental needs, because their parents had already passed away by the time they retired. With advancements in medical care, many retired boomers may also be caring for elderly parents.

Elder care can be very expensive ($3,000 plus per month), and there could be many family discussions if the parents’ retirement income doesn’t pay all the bills. Who will pay the difference if you’re short $1,000 a month? Will the difference be split equally between, say, two brothers, or will one pay more because he earns $90,000 a year and his brother earns $55,000? A difference of $1,000 a month can add up to a lot if Dad lives another 14 years ($168,000 assuming residence costs don’t increase).This could be a long-term financial burden for boomers. In my scenario between two brothers, it’s like an additional car loan payment of indefinite term on top of all your regular bills.

How to stay on track

So what can you do to get and stay on track to “retire early and comfortably”?

  • Investing early and regularly.
  • Try to maximize RRSP contributions, especially as your income rises, to pay less income tax. Most mutual fund companies offer funds suitable for RRSPs, and you can often choose to have distributions simply reinvested in more units of the fund.
  • Take advantage of tax-free growth (e.g., in a TFSA) and any other government incentives (such as the Canada Education Grant associated with RESPs as you save for children’s education). Most mutual fund companies offer funds that are eligible for both TFSAs and RESPs.
  • Reduce debt as you move toward retirement and live within your means (before you’re forced to).
  • Discuss elder care and the various options with your parents early. Don’t wait until they become incapacitated, when it may be too late for these discussions. Talk with your financial advisor and look at all the options available.
  • Don’t invest too aggressively, because markets correct at least once every decade.
  • Keep an open mind to new/alternative investments, because what worked 10 years ago might not work now, but don’t put too much of your nest egg in volatile investments (single stocks, resources, precious metals, limited partnerships, and emerging economies).
  • Always remember, if it sounds too good to be true, it probably is. Nobody can guarantee a return of 10%, 20%, 30% or more per year on an investment. If in doubt (and numbers like that should immediately sound alarms and flash giant warning lights), always consult with an accredited, impartial financial advisor for a second opinion.



Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.