The new retirement season is beginning. What’s that you say? Don’t I know that retirement season is the first two months of the year, when investors can make contributions to their RRSP accounts and still claim the tax deduction for the preceding year? I am well aware of the end-of-February deadline for RRSP contributions but it doesn’t have to be that way. Planning for retirement should not be a one-time occurrence – it should be a continuous process throughout the year. This is not a new idea but it is an idea that needs to gain traction in the minds of advisors and investors.
There are two very good reasons.
The obvious one is financial. The earlier an investor starts saving for retirement, the more there will be when it is time to begin drawing down savings to provide retirement income. That is true whatever asset mix the investor chooses. On the fixed income side, it means more time for interest to accrue. For equity investments, research has proven that it is time in the market that counts. It has been shown time after time that saving off the top of your paycheck on a regular basis is the most effective approach.
The second reason that retirement planning and saving should be a year-round endeavor may be less obvious. The simple fact is that if retirement planning is done properly, there is a lot to it even though there are lots of people who claim otherwise. Doing it properly means tailoring each investor’s retirement plan to the retirement they want and can realistically afford.
Retirement planning isn’t a simple process because everyone who plans for retirement is unique. We make different salaries, we live different lifestyles, we have different visions of what we want retirement to be. It is not to say that there aren’t some general rules that apply but doing it properly means taking account of the fact that every individual who is planning for retirement is, in fact, an individual.
The first step in proper retirement planning is for the investor to envision his or her retirement. This is not a simple process. It’s not simple partly because retirement is in the future and the future always has an element of the unknown. More importantly, when it comes to thinking about the future versus thinking about the present, for most people, the present wins every time.
The final hurdle to overcome is that basic to the ideal retirement is the availability of choice to the retiree. In simple terms, that is the choice of working, studying or playing. The challenge is that for much of our lives, as children, as young adults, as middle-aged adults, we don’t have a wide range of choices in what we do so we are not used to being in a position of making large important choices. Combine that with the fact that choices need ideally to be made now that will affect what we do in the future and it is a difficult exercise.
Let’s go into a little more detail on envisioning retirement. Far too many people think of retirement only in terms of what they are coming from – their current lives and what they do – than what they are going to – what they will do in retirement. Many people focus on the fact that they won’t have to show up at their current job or rather than two or three weeks of holidays each year, retirement will be one long holiday.
That leads some to reason that if they like golf or skiing or gardening for the small part of the year that they get to do it while working, they will enjoy it even more if they can do it all the time. It doesn’t usually work out that way. I do know one retired executive for whom golf is a year-round passion. He happens to have both the motivation and financial resources to make it so. He is the exception. There are too many people who discovered that playing golf seven days a week is not what they really wanted. The bottom line in approaching the envisioning process is that retirement is not one long holiday – although if properly planned for, it can include lots of holidays. And, most people need something to do every day, especially after breakfast.
There is, of course, no right or no wrong answer to what people should do in retirement. The correct answer is simply what works for the person involved. I mentioned above that the choice in an ideal retirement would be among work, play and study. The play part is pretty obvious, but the other two may not be. Studying, whether informally – taking a short course on a subject of interest every once in a while – or formally – pursuing a degree or diploma – is becoming increasingly popular. I think that is the case because studying fulfills several basic human needs: intellectual (and in some cases physical) stimulation and activity, social interaction (if in a class room setting) and a sense of accomplishment – you complete the course, get a certificate, etc. In addition, studying can be combined with travel – you don’t necessarily have to study in your home town.
Working in retirement is a relatively new trend that is bound to grow. Why would a person work in retirement? For some, the answer is depressingly simple: financial necessity. But for most people, that is not the main driver. It boils down to basic human needs. Work can provide a routine, social interaction, a sense of accomplishment. Obviously, getting these from a job depends very much on the specific job. But, they are absolutely achievable. Finally, even if financial necessity may not be the main driver, getting paid is a nice part of working in retirement. Often when I raise the topic of working in retirement, I get groans and sour looks from my audience. I think that comes partly from their assumption that working in retirement means full-time work. It doesn’t necessarily mean that at all. Lots of retirement jobs are part-time. And, while some people continue to do similar work in retirement to what they did in their pre-retirement careers, the range of available jobs is wide open. It’s a perfect opportunity to make a change, try something completely new. It can be a job with lots of responsibility or virtually none at all. My final point on working in retirement is that it will be aided and abetted by the fact that low birth rates in Canada since the mid-1960s mean that the country faces a shortage of workers in the not-too-distant future.
Once the envisioning exercise is done, the real fun begins. It involves one of the most basic economic decisions we make. Do we consume more now, at the expense of consumption later, or do we consume less now, save more and put ourselves in the position to consume more later in life. It‘s never an easy decision, made the more difficult by some of the things I talked about above: the future always appears uncertain and never as real as the wants and needs we have right now. You can now appreciate why the retirement envisioning process is so important: if a person has managed to create a clear vision of what retirement will be, they are much more likely to be able to make the best possible decision about consuming now vs. consuming later.
This column began with the idea that retirement planning should be a year-round process. I hope it has now become clear why that is so. The envisioning process is not a quick process, and may well involve several meetings between the advisor and the investor to discuss it. Only after that is done can the investor come to grips with the decision about consuming now vs. consuming later. And, only then can the actual process of saving and investment decisions take place. So, you can see why I think that retirement planning process should a year-round one.
It doesn’t stop after one year. As an investor goes through various stages of life, values and interests will change, and so will the vision of retirement. Those changes may well require adjustments to the consumption/saving equation. That means that retirement planning should be a continuous process until retirement actually occurs.