It used to be that a person would reach retirement age, walk off the job with a gold watch and a pension, and enjoy a quiet life for a few more years. But now, with longer life expectancies, and fewer workers with pensions, retirement has a whole different look – or, rather, several different looks.
Research suggests that only one-third of the workforce aspires to have the kind of leisure-based retirement that used to show up in advertisements,” says Caroline Dabu, Vice President, Head of BMO Wealth Planning Group, in Toronto. “Many people want a retirement that combines a balance of work and leisure activities, whether that be working two or three days a week or spending time with grandchildren or doing volunteer work.”
Longevity and its implications
One of the main differences between a 21-century retirement and retirement in days gone by is that Canadians are living longer, so their retirement is longer, too. According to Statistics Canada, the average life expectancy of a Canadian male born in recent years is 79, while females have an average life expectancy of 83.
Dabu points out that for the average 65-year-old couple, the odds are good that at least one of them will live to the age of 90, potentially spending about one-third of his or her life in retirement.
“When you put it that way, that’s an awful long time,” Dabu says. “You need to think about how you’re going to spend that time but also how you’re going to fund that time in retirement.”
Pensions now and then
Another big difference for 21 century retirees is that they are much less likely to be drawing a pension than their predecessors were. According to Dabu, only 30 per cent of Canadians now have an employer-sponsored pension plan. And of that 30 per cent, a higher percentage now than before have defined-contribution plans, where you know what you pay into the plan but not necessarily what you’ll get back, rather than the more secure and traditional defined-benefit plans.
“So the onus of saving for retirement is more on the individual than it has been in previous generations,” Dabu says.
The best way to prepare for that, Dabu says, is to start saving early and take advantage of compound growth in tax-sheltered accounts, such as Registered Retirement Savings Funds (RRSPs) and Tax Free Savings Accounts (TFSAs).
“A lot of people think that because they’re still relatively young, they can delay planning for retirement,” Dabu says. “But as we all know, procrastinating saving for retirement can be counter productive to the advantages of tax-sheltered accounts and also have significant impacts on the desired retirement lifestyle.”
Working in ‘retirement’
With the prospect of retirement lasting a few decades, not everyone is eager to get into vacation mode, and stay there, the moment they turn 65. Some people taper off their careers over a number of years and others quit and then go back.
I”ve seen people who will retire, spend some time in retirement and then say, ‘I’ve gone on some great vacations, I’ve played enough rounds of golf, I’m going back to work,” Dabu says. “That work often isn’t full-time work but it can be a couple days a week or doing consulting or project work.”
Aside from keeping busy and active, in mind and body, working past the traditional age of retirement means you can continue to build your retirement assets for a longer time. Not only can you continue to build your savings by continuing to earn income, but you can also maximize retirement income sources by deferring the take-up of your CPP. For every month past age 65 that you defer receiving those government payments, your CPP pension increases by 0.70 per cent.
For example, if you compare two 60-year-old individuals who are each eligible to receive the average CPP pension today, and one starts collecting her CPP today at age 60 and the other at age 70, the one who defers will collect approximately $100,000 more by age 90 than the person who started collecting 10 years earlier.
“The bottom line is that people are aspiring to have the money to make choices in life and to do the things they enjoy when they get to the retirement phase of life,” Dabu said. “Choice equals freedom.”