Peter Drake is one example of the new face of retirement. He worked for 35 years as an economist at the Toronto-Dominion Bank, accepted a retirement package, got bored within a couple of years and went back to work, starting a new career as vice-president for retirement and economic research at Fidelity Investments Canada.
“You think you’re going to be happy with what I call the two Gs, golf and gardening,” said Mr. Drake, 68. “But when I actually started doing it I realized I wanted to do something more. I love my job, I love what I’m doing so I’m working in retirement.”
Mr. Drake is a happy retiree, but what works for him and his wife will not suit everyone.
“The first thing you’ve got to do is sit down and figure out what you’re looking for in retirement. That can be a lot more difficult than it first sounds,” he said. “Then you’ve got to figure out how to pay for it.
“One of the ways we look at it is to say: ‘Aspirations plus financial situation divided by reality equals fulfilment in retirement.’”
But retirement planning is challenging. Many considerations have to be taken into account as people begin serious preparations, and as their investment portfolios mature, new opportunities and challenges emerge and lifespans lengthen.
“It used to be that when people retired ... they lived for a few years longer and it didn’t take that much planning,” Mr. Drake said. “The thing is that what people are doing in retirement now is really changing. People may live as long in retirement as they worked and they’re all doing different things. They’re travelling, or they’re going back to school and some of them are even going back to work.”
As a consequence, a successful retirement requires planning, and each person or couple will need a plan customized to fit their assets and objectives. For that reason, Mr. Drake encourages individuals and especially couples, who face the even more complicated task of structuring assets to meet the needs and wants of more than one person, to seek professional advice.
“I think it’s helpful to work with an adviser,” he said. “You can make a plan for retirement and begin saving on your own. But it’s worthwhile having someone there looking over your shoulder to make sure that you’re actually sticking with the plan. I’m an economist by training, but there’s been a lot written by behavioural psychologists about how people manage their investments.”
But in the last decade leading up to retirement, there are some basics that Mr. Drake said are relevant for most people to consider as part of their planning:
1. Are you saving enough?
Do you have the right balance between what you consume now compared with what you will need and want to consume in retirement?
A generally accepted guide would be to save 10 per cent of your gross income, Mr. Drake said, and to make use of registered tax saving vehicles such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
RRSPs provide a short term tax break and allow your savings to grow free of tax during your working years. But withdrawals in retirement will be taxed as income, although usually at tax rates lower than those of prime working years. TFSAs, on the other hand, are invested after tax is paid and provide no upfront tax benefits. But they allow savings to grow free of tax and capital withdrawals are not taxed.
In addition, non-registered savings can also be helpful in retirement and provide more options for tax efficient retirement income planning.
2. Do not overestimate market returns. When planning your retirement assume a modest and reasonable rate of return in the years leading up to retirement and during retirement. “If the markets do better than you planned, it’s good,” he said, and if they underperform your assumptions “there is more of a safety cushion.”
3. Follow asset allocation retirement strategies. They tend to shift away from equities toward less volatile and risky assets. “Asset allocation is a very personal issue,” Mr. Drake said. “It used to be that the rule was to get rid of all equities in retirement but that’s changing now. People are living longer and as a result a lot are still keep equities in their portfolios, although they may reduce the proportion.” Within that structure there are big differences. A big-cap, dividend-paying equity is more like a fixed-income product than a small cap equity.
4. Determine post-retirement essential and discretionary income and expenditures. Include income from Old Age Security and Canada Pension Plan benefits when calculating your post-retirement income. A variety of online retirement calculators can give you a range of what retirement income you can expect from your savings.
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