Working in retirement is not a retirement plan

You’re probably going to live longer than you think but it if you’re worried about outliving your money, planning to work in retirement is not a panacea, warns Toronto-based Fidelity Investments Canada ULC.

At a media briefing on Monday, vice president of retirement and economics research at Fidelity Canada, Peter Drake, urged those still saving for retirement to take more individual responsibility for their future after work. “You’re going to live longer than you think,” he said, citing steadily rising life expectancy statistics going back to 1921. Someone born in 1921 would have a life expectancy of about 58, a figure that passed 70 for someone born in the mid 1950s and which passed 80 shortly after the new millennium.

Certainly, the latest data from the 2014 Fidelity retirement survey released at the event suggests those falling short of their retirement savings goals are counting on some kind of paying “encore career” to make up the difference. While only 20% of those already retired plan to rely on income from a full-time or part-time job, fully 47% of those still in the workforce expect to have some form of a paying “encore career,” said Drake.

Non-retirees also put their hopes into savings and housing as a way to make ends meet in retirement. While only 58% of current retirees say they will rely on income generated from savings in an RRSP or RRIF, fully two-thirds of non-retirees (66%) plan to do so. Similarly, while only 36% of retirees believe their home equity will help boost their retirement income, half of non-retirees are counting on it.

Clearly, something has to give and that something appears to be the fond notion that people can just keep working past the traditional retirement age of 65. “Planning to work in retirement is not a retirement plan,” Drake cautioned.

Saying you’ll “just keep working” is of course easily said. Indeed, I’ve given that advice to anyone who’s not quite sure whether they have enough money to retire or not. As I quipped on the radio the other day, it’s better to arrive at the train station five minutes early than five minutes late: similarly, when it comes to saving for retirement, it’s better to over-save than under-save. Your children and the government will thank you for over-saving.

Unfortunately, Fidelity’s research shows you can’t count on working in retirement. The poll of some 1,400 Canadians found that of those not working, fully one in five retirees would like to work if they could. However, 15% can’t find a job and 23% say employers aren’t interested in employing retirees.

Then there are health and health care issues. Drake says 38% of retirees not working have health issues that prevent them from doing so. And even for those who are themselves healthy, 12% have to care for another family member. Out-of-pocket health care costs are an important consideration for retirees, Drake said. Even though this is Canada, 30% of health costs are not funded publicly, putting more pressure on finances the older you get. Citing per capital public health care expenditures, the big blips are right after birth and then after 65. The per capita annual expenditure is well under $5,000 from age one to age 64 but hits $5,828 between 65 and 69, passes $10,000 between 75 and 79 and really starts to spike after age 85–past $20,000–hitting a peak of more than $24,000 after age 90.

Drake noted that generally speaking, women can expect to outlive men, but the longer they do, the more the problems of dementia – especially Alzheimer’s – can arise.

Another byproduct of extended longevity is that inflation really starts to bite into the purchasing power of a typical retirement nest egg. While inflation has been low and consistent since the early 1990s, it could rise in the future, Drake warned. And even low inflation can reduce purchasing power. A nest egg of $50,000 today would have the purchasing power of just $30,479 25 years from now even with relatively benign inflation of 2%. If inflation were 3%, the purchasing power of that $50,000 would fall to less than half 25 years later: $23,882. And at 4% inflation, it would have the spending punch of just $18,757.

Jonathan Chevreau is Chief Findependence Officer for www.financialindependencehub.com. He blogs there and at MoneySense.ca.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.