How to protect yourself against outliving your savings
Debt levels among average Canadians are on the rise, and many people aren’t saving enough. Those two factors can make retirement planning difficult.
In fact, outliving the money tucked away in a savings or investment account for the retirement years is a real fear for many Canadians. A recent report by the World Economic Forum had people outliving their savings past the retirement age of 65 by as much as a decade. The spectre of having one’s retirement equity running out has many Canadians concerned and looking for solutions.
Why the shortfall?
Canadians have a lot of debt, and the more debt you have, the harder it is to put money away for retirement. Equifax reports that the average debt per consumer (including mortgages) was up 2.6 percent in the first quarter of 2019 compared with the same period in 2018.
Also, while more people are members of registered pension plans (RPPs), the proportion of all paid workers who are covered by an RPP went down from 37.5 percent in 2016 to 37.1 percent in 2017, according to the latest figures from Statistics Canada released in June 2019.
The cost of living also keeps going up, with many people living paycheque to paycheque. Food and housing prices, in particular, have been rising.
Adding to all of that is that Canadians are living longer – to an average age of 79 years for men and 83 years for women, according to Statistics Canada. That means, if they don’t compensate by working longer, their retirement savings must last longer.
Starting early to build a nest egg is a wise move. The magic of compound interest means that the earlier you can start saving for retirement, the more you can make your money grow. But young people are having difficulty saving for retirement, as they are dragged down by debt, and many are working in the gig economy without comprehensive benefit and employee sponsored retirement or pension plans.
Trying to catch up on savings later in life becomes increasingly difficult. For instance, if you put away $1,000 a month, in 30 years at a 6 percent interest rate, you’d have more than $1 million at the end of those three decades. But if you put away that same amount at the same rate just 10 years before retirement, you’ll have amassed just under $168,000.
Ways to help ensure you don’t outlive your savings
Besides squirreling money away, there are a few other things that can help protect you from outliving your savings:
- Delay retirement, either by continuing to work full-time or by getting a part-time job
- Buy an annuity (a fixed sum of money paid to the individual each year, in a lump sum or series of payments). The latest federal budget had a few incentives with new annuities targeting retirees, including an Advanced Life Deferred Annuity (ALDA), which is an investment option for those with registered plans like RRSPs or RRIFs
- Postpone your Canada Pension Plan (CPP) to age 70, which increases your benefits by as much 150 percent of what they would be at age 65, and nearly 250 percent of what they would be at 60
- Try to bring down your debt as early as possible. One way could be through debt consolidation, perhaps through a Home Trust Equityline® Visa, which is a revolving line of credit secured by the equity in your home. This could allow you to put some of the money you save toward your retirement
- Keep up the value of your home in case you want to use your equity for your retirement income. You could downsize and invest the proceeds, sell your home and move somewhere less expensive or rent out space. A home equity loan can help with renovations and keeping up the value of your home
- Consider long-term care insurance, which provides coverage if you become unable to care for yourself and need help from a caregiver or nursing home services
Remember, people are living longer. Your retirement years could last 20 years or more past the age of 65. You want to make sure you’re prepared.
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