Illustration by Sam Island
Planning for your golden years doesn’t have to scare you. The reality of retirement is far more positive than people think. Ian McGugan answered commonly asked questions about planning for life after work. Here’s one to start.
How can I fix a broken retirement plan?
Don’t despair if retirement is a decade away and you’re not quite where you want to be financially. You have options.
The obvious one is to save more. If that’s not possible, consider working longer.
“The way the retirement math works, working a few years longer can make a huge difference,” says David Aston, author of The Sleep-Easy Retirement Guide.
Delaying retirement gives you more time to save. It gives your investments more time to grow. And it means your savings don’t have to support you for as long.
On top of all that, working longer may allow you to defer Canada Pension Plan (CPP) and Old Age Security (OAS) past the standard start at age 65. Those who put off collecting CPP until 70 will collect 42 per cent more a month than if they started at 65. In the case of OAS, 36 per cent more.
“If people are worried about the future, CPP is the best guarantee they are going to get,” says Bonnie-Jeanne MacDonald, director of research for financial security at the National Institute on Ageing. “It’s safe from market crashes, it’s safe from inflation, it’s safe from financial scams.”
When does it make sense to take OAS early?
Frederick Vettese, an actuary and author of Retirement Income for Life, agrees. He has long suggested that people defer CPP to 70 if they’re able to make ends meet until then. He now suggests people think about doing the same with OAS.
He argues that the recent outburst of inflation demonstrates the value of the inflation protection built into CPP and OAS. Both programs automatically increase payouts to keep up with rising prices. That makes them very attractive for anyone worried about the outlook for inflation in the years ahead.
“Even if the current outburst of inflation subsides, we know it can rear its ugly head again,” Mr. Vettese says.
What else can people do if they are on the verge of retirement and worried about whether they have enough money?
Mr. Aston suggests taking a close look at your living costs and pruning unnecessary expenses – “there is usually at least some mindless spending that you can cut without much pain.”
For his part, Mr. Vettese suggests cutting your investing costs. Moving to low-cost exchange-traded funds (ETFs) and similar products can save you thousands of dollars a year compared to the cost of owning full-fee mutual funds and working with a traditional financial adviser.
CPP and OAS: How the financial supports affect your retirement plans
You may also want to consider annuities. These are essentially contracts with an insurance company. You hand over a set amount of money. In return, the company promises to provide you with a guaranteed monthly payout for life.
The stability that annuities provide can be highly attractive, especially if you expect to live a long time. The catch is that annuities are invested in extremely safe investments with relatively low returns, so they may not immediately strike you as a great deal. Plus, the buying power of their payoffs can be eroded by inflation.
Newer products such as the Longevity Retirement Fund from Purpose Investments and the GuardPath Modern Tontine from Guardian Capital go a step further and deserve a closer look. (Ms. MacDonald and Mr. Vettese serve on the advisory board of the Longevity fund.)
The newer products invest in a broader range of assets than traditional annuities. This should improve payouts over time and provide more protection against inflation. In some ways, these products function like pension funds. However, the details are complicated. Study them carefully to see if they are right for you.
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