We have all dreamt of it, usually after a particularly demanding period of work. Cleaning off our desk, and departing indefinitely from the office, idealizing a permanent beach vacation (or functional equivalent). Retirement is defined as when a person ceases working voluntarily, as they have built up enough resources and income entitlements to do so. However, the new retirement will likely mean something else, whether it be partial retirement, career change, or retiring later.
Surprisingly, despite its intuitive allure, people can be resistant to actioning a retirement plan. Maybe it is because of the long timelines or picturing much more mature, possibly ailing, versions of ourselves. It is possible we have the fall back plan of their children taking care of them (or those future lotto winnings). I found it helpful to call the goal ‘financial independence’ instead of retirement in conversations with clients. As that is what it really is, a period in your life where you have the option, not the obligation, of gainful employment. “Freeing up the clock” as one of my former clients once described it.
Retirement reality check
However you prefer to conceptualize it, retirement planning is arguably the most challenging part of financial planning, and the current trends exasperate this. With timelines involved as much as fifty years or more, accuracy is questionable. As life is unpredictable, it is impossible to correctly forecast retirement using your plan assumptions. However, if it is really an exercise in futility, then why should you retirement (or independence) plan? The outcome may not be what is projected, but you will benefit from the habit of saving and investing. Generally preparing for retirement will fortify your position and net worth, having a favorable general outcome for your circumstances. You will be better at dealing with life’s surprises and opportunities. You will be less stressed, more proactive. Also, if you update the financial plan periodically, the retirement plan will become more accurate the shorter the timeline gets; with the most intensive scrutiny needed three years before and three years after the projected retirement date.
Retirement is a dying concept as there are environmental headwinds making planning and investing difficult for most households. The great depression generation with their steadfast savings style, (pro) pension reform, robust interest rates in the 80s, and prolonged lifespan in developed countries were the first generation to realize retirement as a cohort. Today, a mix of high debt, low interest rates, income instability, increased forecasted longevity, increased medical/long term care expenses, and a trend of reducing pension entitlements (public and private) make retirement planning more of a challenge. These trends will strain the ‘retirement’ of generations that follow even more.
The single greatest threat to retirement is debt. Retirees are accumulating more debt, and there is a trend of retiring with debt and/or working longer. A major Canadian bank, CIBC commissioned a study in 2012 by Harris/Decima which stated that 60% of retired Canadians have debt. According to Statistics Canada, the labor participation of Canadians fifty-five and above dipped in the mid ninety’s and has been progressively increasing since people are working longer. Why is debt the single biggest threat to retirement? Because households cannot accelerate with their foot pressing hard on the brakes.
That effectively is what debt does, it constricts cash flow because the household has already spent their future income. It is modern slavery. Is it possible to have debt and save for retirement at the same time? Yes, but in our easy credit society, you have to have discipline and both cash flow and net worth needs to be trending positive. Also, people like to distinguish between ‘good’ debt and ‘bad’ debt. In isolation, all debt is bad debt. However, if you have to acquire debt, it should do at least one of the following things for you: be a tax write off, directly decrease expenses, directly increase income, directly increase net worth, or save you from undue hardship.
In a recent report, the IMF identified Canada’s two main areas of economic vulnerability as an overheated housing market and our large household debt. Canada is not alone in this trend. According to another interesting report by McKinsey & Company, 80% of countries share the trend of higher household debt, 74% of the debt being mortgage debt. Canada also has the dubious distinction as one of the countries identified with possibly unsustainable household debt.
Back to basics
It is well stated that Canada’s population has a high level of ‘financial illiteracy.’ So much so, that Canada has dedicated resources to a financial literacy task force, branded a financial literacy month, and created a financial literacy database. Although well intended, these initiatives have been pure optics so far, and there has been no improvement yet in Canadian household fundamentals or policy to support it. In fact, it may contribute to a learned helplessness; clients find personal finance is too difficult, and then observe everyone is in the same situation.
I do not believe people are stupid, which feels like the implied assumption when you call a population financially illiterate. I have been in social settings in awe where I had people explain to me complex intricacies of consumerism. People are very smart, very capable of learning and retaining vast amounts of information – just ask them the stats on their favorite sports team or how to navigate a data plan. But our behavior is very biased by short term rewards, to the point where we may be throwing away their future. Debt accumulation offers instant gratification, investing and savings offers the opposite in the short term. I believe our policies are creating circumstances where people look financially illiterate, but they are actually being rewarded for their behaviors. Easy credit can look like no consequences spending. Our modern developed societies are built on separating the consumer from their money; it is short term gain for long term pain.
Dream beyond debt
Debt is rewarded and saving is punished. In Canada, like other countries, our interest rates are still at historic lows, it is actually more beneficial for households to increase their lifestyle through accumulation of debt, at interest rates that are effectively below inflation. Home ownership is considered to be one of the best ways of increasing household net worth, so households are paying more for the potential future privilege of attaining an inflated net worth promise. Plus, as many justify, if everything goes wrong, you still have a house to live in. Most people justify: ‘if you save your money, you make 2% and half is taxed. If you invest it, half could be lost like in 2008. How smart is that?’
As someone trying to improve your financial situation, you need to find strategies and habits to counteract these headwinds. And with mainstream articles like the recent coverage of the Fraser report normalizing debt, it is no small task. We need to find ways to plan to increase our cash flow stability. To make investing accessible. If the retirement goal is in fact unattainable, how do we best manage our debt and investment portfolios to increase our quality of life? How do we look at our investments, and related fees, differently in a low yield environment? Is it possible to look at alternative investments with higher risk but also better risk management strategies? Can we also look at our spending and cut the things that offer the least value to our life? Can we learn not to equate a ‘life’ with consumerism? As an objection to saving, I have heard clients say: ‘yes but you only live once!’ It can be responded that yes, you only live once, so why would you waste a life worrying about money? You only live once, and that is why you need a nest egg!
Plan for independence instead
This article is not intended to provide the solutions for every situation to engrained social expectations of retirement planning (or financial independence) that have major headwinds due to the current economic landscape. It is meant to provoke discussions about how we can create opportunities to enhance our standard of living through a form of ‘independence planning.’ The concept of retirement may be antiquated, but working in a modern form of indentured servitude through household debt with the unrealistic hope of retirement as the light at the end of the tunnel, is just plain tragic.
Do not let yourself be a victim.