10 Retirement Myths – Part 1
Retirement Myth #1: Planning is just for Old People
We are buried in data, but starving for information that is relevant for us. Retirement planning is relevant and for everyone, including you.
The definition of retirement is changing and even though it may seem like a long way off, work that to your advantage. Starting a plan and sticking to it are the hard parts, just like diets and exercise. Every little bit helps and makes it easier if you start early enough. Harness the power of compound interest, where planning and saving a little now on a regular basis can let money work for you, 24 hours a day, 7 days a week, for decades. Your money seems to grow slowly at first and then starts to balloon as you get older, even if you put in the same amount of money. Every year you delay means you’ll need to save more money and perhaps take on more investment risk in order to reach your goals.
Retirement Myth #2: I’ll never be able to save enough for retirement.
That may seem true when you’re young, starting a family, paying off those school debts, and dealing with a mortgage. Your income will go up and hopefully, you’ll work on developing your money management skills and habits, including paying yourself first for your future dreams and goals. You also may not need as much money as what you traditionally hear.
Don’t fall into the trap of thinking it’ll be easier to save for retirement in just a few more years. After all, there are competing and expensive needs no matter how old you are. First, you pay off your college, and the next thing you know, you’re helping your kids pay off theirs. Then there is the house, the kids and grandkids, wedding expenses, and home renovations. Where did the time go? Every year you delay means you’ll need to save more in order to get on track for a retirement that’s getting closer and closer.
The best time to start saving for retirement is when you were young and started working. The second-best time is now. Let the power of compound interest work for you as long as possible.
Retirement myth #3: I need $500,000, $1 Million, $2 Million to retire.
The fact is that your “number” can vary greatly depending on your personal situation and goals, how long you expect to live, whether you will be single or with a spouse/partner, and when you will retire. Check if an advisor who specializes in retirement planning or better yet, retirement income planning, offers tools or help to estimate how much you need to save.
You may try some of the tools available from trusted sites produced by large financial institutions. The Retirement and Savings Tool from Empire Life can also help you determine how much income you will need to retire. It’s simple, fast, and easy to use and you can share the results with an advisor to get the conversation started. And don’t forget government benefits like Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security.
If you want to maintain the same lifestyle before and after retirement, your number is tied to how much income you will need to provide the same consumption dollars. That’s the money you normally spend on your own lifestyle. Add some extras for that bucket list of yours for those early years of retirement when you will be most active and will no doubt spend more money.
Retirement Myth #4: You need 70-85% of your current income in retirement.
A growing number of analysts and researchers on retirement income and spending patterns have found that most people will be fine if they target 50% of their pre-retirement earnings. Statistics Canada has many years of supporting data on this.
You see, the focus should be on consumption dollars; what you spend on yourselves, and your own lifestyle. For most Canadians, that excludes mortgages, child-rearing costs, and saving for retirement – things you won’t be, or shouldn’t be spending money on during retirement. You will need 100% of your consumption dollars and some extra money in the early, active years of retirement for those special trips and experiences you have dreamed about for years. Your actual replacement income goal will depend on your marital status, whether you own a home, whether you have children and how much money you earn. The range can go from 40-60% as a comfortable base level.
It’s really valuable to work with an advisor trained in the unique field of retirement income planning to work out what you need and what you want to do specifically, for the various phases of your retirement.
Retirement Myth #5: Never touch your capital.
Conventional thinking and approaches often work on keeping your assets intact during retirement. That may work for the wealthy, whose investments generate plenty of cash flow so that they can preserve their capital for their children, grandchildren, and favourite causes. For most of you, it’s okay to spend your capital as a way of providing lifetime income. While saving may be a goal in itself during your working years, plan on orderly spending of what you have saved during retirement. Isn’t that what you intended? It really is okay to spend your capital. That’s what it is there for. And using capital as part of your cash flow is tax-free. The idea for many like you is to spend down in retirement. Saving is not a goal in itself. Work with a retirement income planner on ensuring that you have enough capital to provide you with the cash flow you need no matter what happens; no matter how long you live. Look at alternatives to provide legacies for children and favourite causes while giving you enough cash flow to fund your basic lifestyle and pay for those dreams and plans on your bucket list.