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Arrested retirement

Many reasons to put it off -- not all of them financial

Hey there, time traveller!
This article was published 4/7/2014 (1144 days ago), so information in it may no longer be current.

The term "Freedom 55" is everywhere. And most people dream of retiring as soon as possible, with age 55 the milestone for an early exit from the workforce.

But the dream of early retirement is slipping away for a lot of us. Fewer workers, about three in 10, have defined-benefit pensions -- the gold standard of retirement finance.


Statistics Canada data show people are also saving less than one-fifth of what they did 30 years ago.

Add to the fact people are also not able to save as much as they once could with contributions of disposable income to savings falling to almost one-fifth of what they were 30 years ago, Statistics Canada reports.

And when we do save, we are faced with having to take on more risk -- investing in the stock market -- to keep ahead of inflation because the average five-year GICs pay less than 2.3 per cent.

And we are retiring later. The average retirement age is 66 up -- from its all-time low of 61 in 2000, Statistics Canada reports.

Putting off retirement is not a dire scenario for a lot of people, says Stephen Reichenfeld, a wealth counsellor with Franklin Templeton who works with families who have a high net worth.

And one of them has to do with increased quality of life.

"London Life sold this concept of Freedom 55, which is great marketing, and it says a lot about lots of contributions early in life and the effect of compound interest," he says.

"But when you look at the research -- such as a mental-health study from Australia -- the conclusion is that work is good for you."

Reichenfeld knows all about the benefits of working longer. He recently penned an article for Fiduciary Trust Canada's spring issue of Perspective magazine, called the Changing Face of Retirement.

He argues working longer in life -- whether it's for a wage or as a volunteer -- is an important marker of health.

"The point being that when you have got people whose life revolves around their work who are getting forced to retire at a certain age -- like 65 -- the statistic of them not surviving very long is very high."

Of course, if you're doing manual labour, you can't do it as long. "But as we become more and more a knowledge economy, there's knowledge that you can transfer and carry on not just in a menial role, but a functional role within the employment world for much, much longer than there was 30 years ago."

In other words, all that skill and know-how is likely to be needed longer, especially as our population ages and experienced workers become more difficult to replace.

Of course, a lot of retired people get along just fine not working, but many retirees keep busy by doing unpaid work -- helping with the grandkids, working around the house and volunteering, he says. And even unpaid work can end up helping the bottom line.

"It (retirement) brings its own set of stresses with it, and I think some sort of employment, even volunteering, gives you purpose and can help you with the financial end of things," Reichenfeld says. "If you're hanging around the golf course a lot, you tend to buy a sandwich and a beer -- it adds up."

Then again, many other Canadians will and do need to work longer because they don't have enough money to retire, says Rick Headrick, president of Sun Life Global Investments.

"They're changing their lifestyle so they don't run out of money, and it's kind of an interesting twist on the old concept that people retire and just lift their feet and relax," he says.

Recent census data reveal the fastest-growing age groups are 60 to 64 followed by people 85 and older.

Yet a lot of people plan their retirement financially until about age 85, figuring they're unlikely to live that long, or they won't need a lot of money.

"Most people think that would never happen to me," Headrick says about living well into old age. "But it might."

And there is a possibility people who are relying increasingly on their registered money (RRSPs, LIRAs, LIFs, etc) could run out of money later in life -- precisely when they may need additional capital for enhanced care.

And one culprit in this instance is the current rule forcing retirees to make increasing minimum withdrawals from their registered retirement income fund (RRIF) as they age, says the author of a recent report.

Alexandre Laurin with the CD Howe Institute recently co-authored a paper on RRIFs, which suggests the rules need an update because they're onerous and could lead to some retirees running out of money in their 90s.

Under the rules, retirees must convert their RRSPs to a RRIF at age 71 and make small mandatory withdrawals annually that increase every year thereafter until age 94 when the withdrawal rate plateaus at 20 per cent a year.

"So you get a pretty stable income from it until that time and then it will start dropping pretty fast."

The problem, Laurin says, is the rules force age 90-plus retirees to withdraw large sums annually from their RRIFs, exposing their capital to taxation even when they may not need all the withdrawal for income. As a result, their RRIF money can quickly erode, and if they have few other assets in other accounts, they could face running out of money sooner than expected.

When the rules were first put in place in 1992, Laurin says, the federal government had an incentive to force retirees to withdraw fully taxable income from their registered retirement income fund (RRIFs) because it was battling a deficit.

"But now we're in a different situation, and it doesn't really matter to the government whether it gets taxes now or it waits a few years and gets taxes with interest."

Laurin says it now makes more sense for the government to remove the mandatory minimums altogether so retirees can better strategize their income to make their savings last longer.

"It (the rule) doesn't need to be there. The money is going to be taxed in the future at some point," he says.

"If it's taxed as part of the estate, it will be taxed in one chunk, likely at the highest marginal rate."

And while Laurin concedes retirees don't need to spend the withdrawals; they can reinvest it, the rules just muddy the retirement income-planning process.

"It's already complicated enough."


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Updated on Saturday, July 5, 2014 at 9:47 AM CDT: Corrects StatsCan statistic

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