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Retirement Downsized: How a late-career job loss during prime earning years can derail retirement plans

Mia Sally Correia, seen here her Winnipeg office on Feb. 27, 2019, was laid off from her government management job recently, a move that has set back her retirement plans.

JOHN WOODS/The Globe and Mail

When she was young, Mia Sally Correia had dreams of becoming a writer. Instead, she chose to work as a civil servant.

“For me, it was a default career and a safe choice … thinking I could retire at 55 with a good pension.”

For almost two decades she moved up the ranks of bureaucracy, eventually earning a six-figure salary. What’s more, she was on track to retire early and try her hand at writing again.

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Then her plan veered off course. Ms. Correia lost her job early last year, laid off as the Manitoba government sought to cuts costs.

These days, the 52-year-old Winnipeg woman is struggling to cobble together enough income to support not just her lifestyle, but any semblance of the retirement she had once envisioned.

Losing your job in your 50s and 60s – a time when people have traditionally earned the highest incomes in their careers, paid off debts and power saved for retirement – can be particularly financially devastating. Finding an equally high-paying job later in life can be challenging, derailing retirement dreams years in the making.

“You could have plans all laid out and scheduled where you retire at 62 and the last mortgage payment is at 61 years and nine months of age,” says Daryl Diamond, a Winnipeg-based certified financial planner and author of Your Retirement Income Blueprint.

But life often has its own agenda, as the roughly 850,000 Canadians laid off last year likely now realize.

Among those numbers, from Statistics Canada, about 198,000 individuals – or 23 per cent – were between 55 and 64 years of age, a number that has stayed relatively stable for the past five years. For many of these Canadians, the job loss comes at a critical stage in life, when people accumulate most of their wealth.

According to a 2017 report on income equality by the Fraser Institute, Canadians often earn their highest incomes and build much of their wealth from their mid-40s through to their mid-60s. The study from the conservative think-tank found that Canadians’ focus was on wealth inequality is somewhat misguided, arguing Canada’s rich are not necessarily becoming richer and the poor more impoverished. Rather it contended Canadians, on average, have less wealth when they start their careers. Then most workers earn their highest wages in mid-life, allowing them to build up assets critical for retirement, a period when their income and wealth generally decrease.

Like thousands of other Canadians in her age group, who lost jobs recently and would otherwise be enjoying their prime income earning years, Ms. Correia finds herself reeling.

Her situation might have been much worse had she not had a defined-benefit pension plan to fall back on, which she still plans to take at the age of 55. But missing critical high-income years of service will reduce the monthly benefit. And in the meantime, Ms. Correia is making do on much less income, and waiting to draw on her pension as a matter of financial survival as opposed to having it provide support while she tries her hand at writing.

It’s hardly surprising that Ms. Correia and others who lose their job later in life often have to tear up and rewrite their retirement plan.

Not only are their retirement dreams in peril. They have more pressing problems such as maintaining large household budgets, previously bolstered by good wages. Many also still have debt hanging over them. According to Statistics Canada, about 82 per cent of individuals between 45 and 54, and about 73 per cent between 55 and 64 carry debt of some kind.

(And this problem is likely to worsen if the long-term trend holds showing those numbers in 1999 were about 76 and 61 per cent respectively.)

“The first thing is don’t panic; don’t make any hasty financial decisions; sit down and take inventory where this [job loss] actually leaves you,” says certified financial planner Scott Evans, with BlueShore Financial in North Vancouver.

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Among the considerations are the pension plan, if you have one, the registered retirement savings plan (RRSP) and other savings, along with the severance package, if there is one.

Looming debt payments can make the “don’t panic” advice difficult to follow. Many individuals may be tempted to draw on their RRSP initially to make the mortgage, auto loan, credit card and line of credit payments, Mr. Evans says.

The problem with this decision is twofold. First, individuals are reducing their retirement savings at a time when they should be at least preserving wealth. Withdrawals for needs today can have long-term effects, reducing available cash flow in old age by tens of thousands of fewer dollars, he says.

There are also near-term implications regarding income tax.

Most people lose their job after already earning income for a few months into the calendar year. An RRSP withdrawal in the same year is likely to push them into a higher tax bracket, meaning they could face a significant tax bill the following spring.

Unless the person is about to retire, the tax-free savings account would likely be the first choice for a savings withdrawal, Mr. Diamond says.

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All of this speaks to the importance of planning ahead not just for retirement, but for the unexpected.

This is why building up the TFSA or a non-registered savings account with enough cash to cover at least three months of living expenses is so important, says Elizabeth Harding, a portfolio manager and certified financial planner with Orlic Harding Cooke Wealth Management Group, Richardson GMP in Burlington, Ont.

“But I would say the majority of people don’t,” she adds.

Whether you’ve got those savings set aside or not, losing your job inevitably calls for revisiting your retirement plan, along with taking stock of your costs of living, Ms. Harding says.

“The instinct is to pull the covers over your head and not want to deal with things.” But it’s best to tackle these tasks sooner than later, she says.

Working with an adviser, or even running the numbers on your own, will help you understand the right course of action. Only then, with context of the potential implications for retirement, do you know whether drawing on the RRSP to pay the bills is a better option than using a line of credit.

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Making informed choices is critical because the wrong decision today can lead to having few options in retirement.

“Your quality of life is ultimately determined by your ability to have choices,” Mr. Diamond says. “Unfortunately, when the downsizing happens at a brutally inconvenient age, you may not have a lot of choice.”

Or, at the very least, the available options are much less desirable, like working longer, or giving up the more lofty and costly goals, such as spending winters down south, he adds.

Ms. Correia is painfully aware of her diminishing options.

“It’s affected every single aspect of my life,” Ms. Correia says of her job loss. Her marriage – already facing challenges – fell apart. She sold her condominium and has moved in with family. She has since found work, starting an adult education consulting business while also running a Portuguese community newspaper. But the income from these jobs is a considerable drop from what she once earned, and much less stable.

“Because I had a healthy salary, I had healthy debt,” she says, adding this partly led to her decision to sell her home. “People need to understand what happens when you just get dropped unexpectedly by your employer.”

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Still, she is grateful she is resilient. “Yes, I was broadsided,” she says. But life’s speed bumps have thrown her off course before.

“I will come back better, though it’s going to be more difficult because I’m older.”

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