Most of us view retirement as the inevitable final chapter of our work life. We go to school, we hit the job market, we work for several decades, and then at some point we pack in the nine-to-five business. For many years now, there has been an entire industry devoted to planning, saving, investing and insuring people’s retirements.
And retirement is much on people’s minds right now not to mention in the media and in the bookstores because we baby boomers are all heading into our twilight years. Like so many other things that affect this huge cadre, retirement has become a big issue.
But though we think of retirement as a natural part of the lifecycle, in fact it’s anything but. Retirement is a purely man-made phenomenon, invented in the late 1800s by that great social reformer, German Chancellor Otto von Bismarck. Confronted with widespread unemployment among the youth of his country, Otto feared a revolution unless he could create some meaningful work for them. As any politician can tell you, having a large portion of the population idle and disgruntled is bad for business.
So with a stroke of genius, he came up with the concept of “the golden years,” and put all the older workers out to pasture. This allowed the youngsters to get their chance at bat. The idea worked well in Germany for several decades.
And when the Depression hit North America, our politicians were faced with the same dilemma. They looked at Germany’s example, and saw mandatory retirement as a tool that could work on their own social issues. The idea worked so well that for several generations, we have all assumed unthinkingly that retirement is some kind of natural progression.
But as with any policy tool, it has its strengths and its shortcomings. For many people, retirement is a welcome respite from their years of toil. Others, though, have a much more difficult time coping with the transition from busy-ness to enforced idleness. Retirement for them is more like putting a piece of machinery in mothballs, or closing down a thriving factory: there’s a sense of loss and waste.
The fact is, most Canadians don’t plan to retire anytime soon. Most of us have good work skills that will allow us to earn and be productive for a long time yet. We may work different hours, or just do parts of jobs we like, or even work without pay for charity; but we will likely continue to work in some fashion.
Still, many people fear retirement—and financial planning is a big part of that fear. In most companies in North America today, pension plans have gone the way of the dodo. Now, people face the challenge of funding their own retirement.
To help them with this task, many turn to commercial software packages. They don’t provide much comfort, though. Assuming you’ll live for twenty or thirty years after you retire, and that you’ll want a reasonably comfortable lifestyle, the funding requirements can run into the multi-millions.
I find that the effect of this is usually to completely discourage people from planning their retirement funding. When the numbers get too big, and the savings required too onerous—well, most investors would rather just forget the whole business. They sweep it under the rug, and plan to deal with it another day.
But such unexamined problems unfortunately tend to weigh more on your psyche the longer you ignore them. So instead of trying to pretend that this particular 800-pound gorilla isn’t really on your back, let’s try to do some planning.
Realistically, there are only two sensible approaches. You can either choose your retirement age and the lifestyle you want, and then save toward that goal; or you can realistically determine how much you can possibly save, how much it’ll net you at retirement, and then accommodate your lifestyle to that budget.
If you choose the latter, there are various adjustments you can make to decrease your income requirements. You might consider moving out of the city, or even out of the country. In Mexico, for instance, you can live very nicely for about half of what it costs to live in most parts of Canada. Granted, that’s not for everyone; but it is an option—and you’d never have to shovel snow again.
Then again, you may not have to do anything at all. I had a client once who was petrified of retiring: he earned $250,000 a year, and thought he needed millions to replace that income. But when we closely examined his situation, it turned out that he was actually living on only $60,000 per year—that was the real figure his retirement income had to replace. His personal gorilla got a lot smaller that day.
There’s a valuable lesson: when you look hard at your cash flow, remember to eliminate the expenses that will go away in the future: things like high taxes, contributions to savings plans, etc.
Remember, retirement is just a concept that someone made up—one possible ending for your personal life story. If you’re creative enough, feel free to rewrite the plot to suit yourself.
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
Richardson GMP Limited, Member CIPF
Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
