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Financial ground shifts beneath would-be retirees

Fred Penney makes it clear that he has no plans to retire. The business owner based in Grand Falls-Windsor, Nfld., wants to work well into his 60s or longer. "My father is still active in the business and he's 69," says the 45-year-old vice-president of Labrador Concrete Products.

However, Mr. Penney is still saving for his golden years. While he may not want to spend all his time lounging on a beach, he does expect to slow down as he gets older. He may even purchase a Florida condo one day. "At some point I'll want to take January and February off," he says.

A lot of Canadians in Mr. Penney's age group are starting to think harder about what they'll do in their 60s. If this were a generation earlier, though, there wouldn't be much debate – you'd retire at 65 and that was it.

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"It's really different today than it was for my Mom and Dad's retirement," says Daryl Diamond, president of Winnipeg-based Diamond Retirement Planning Ltd. and author of the recently released Your Retirement Income Blueprint. "Retiring at 64 was considered retiring early."

Now people live much longer, so any money saved has to last for decades. Plus, Canada plans to effectively reset the age of retirement by boosting the eligibility age for the Old Age Security benefit to 67 from 65, beginning in 2023.

As ideas around retirement have changed, so have some of the ways to save for it.

Mr. Penney started saving when he was in university. Like most savers back then, he invested in a registered retirement savings plan. But at 38 he ditched that account – he expects to still be in the top tax bracket when he's older, so there was no benefit. While he still holds money in his registered account, he's currently putting about $5,000 a year into his tax-free savings account.

Most of his savings, though, are in a non-registered account. He owns exchange-traded funds, which he typically trades every 25 days; only 15 per cent of his money is set aside for long-term holdings. However, the money he's trading is growing, he says.

While Mr. Penney is a more savvy investor than most, he has become slightly more conservative as he's gotten older, moving out of Canadian small-cap stocks and into more diversified ETFs.

Jason Round, head of financial planning support for RBC Financial Planning, says that Mr. Penney is correct to move into more conservative investments, even if he's still mostly holding equities.

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People who are 45 need to start thinking about how much they're going to need in retirement. That should then inform how much risk they can take on, he says.

In the past, the rule of thumb was that people needed to become more conservative with their investments as they aged. Mr. Round says that more diligent savers may be in a position where they can separate their accounts into two parts. There could be an account that's used to fund retirement, which would be invested more conservatively, and another with excess cash that could be more aggressively invested in equities.

Many experts still say that younger people should be more weighted to equities – their time horizon is longer so their portfolio has time to recover from a downturn – but even that rule isn't as black and white as it once was.

These days, people in their 30s need to save exorbitant amounts to buy a house, and many are paying for child care, schools and other family-related expenses. While everyone should be thinking about retirement, says Mr. Round, realistically, younger Canadians are just trying to pay the bills.

Instead of focusing solely on retirement, 20- and 30-somethings need to plan for specific goals. "The most important thing is to think about what you want to achieve," he says. "That could be buying a first home or finishing up college. It's about stability and getting on a solid path."

David Aeri, a recently married 30-something Toronto-based IT manager, is aggressively paying down his mortgage, and he's investing in an RRSP. He puts money away every month and increases the total amount by $25 every year.

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While he admits that saving could become more challenging as children and other family demands come into the picture, he makes sure that no matter what happens he budgets and sticks to a financial plan. That should keep him on track as his household expenses increase, he says.

Mr. Diamond says that a lot of people still have trouble saving. Many clients, he says, have to work past 65. But when it does come time to retire, he suggests people use only about 5 per cent of their assets to live on. Some will have to draw down their savings; others may be able to invest enough – through dividends or higher yielding bonds – to generate a 5-per-cent return.

No matter what age you are, though, it's important to know that retirement has changed from a generation ago. The only constant is the earlier you begin saving, the better off you'll be.

"I've been saving since university," Mr. Penney says. "If I ever do give up work, at least I'll have enough to be able to choose my own path."

Demographic decisions

Investing advice by age group:

18 to 34: Keep your golden years in mind, but focus on goals such as buying a house. Invest more conservatively with short-term savings and more aggressively – in equities – for longer-term retirement savings.

35 to 54: Start thinking harder about what retirement is going to look like. The closer you get to 55 the more concrete a plan you should develop. Move money that you'll need in retirement into more conservative securities.

55-plus: Plan a retirement date. Invest more heavily in retirement savings accounts and figure out exactly how much you'll need when you stop working. Put the money you'll need in fixed-income vehicles, but continue growing any extra cash.

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