Dec 6, 2019
Payback Time: It’s never too late to salvage your retirement
By Dale Jackson
How to get your finances in order so you don't outlive your savings
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As we head into a new decade, far too many Canadians older than 40 will need to confront the reality that they are not prepared for retirement. Survey after survey shows an astonishing portion of us are not only long on debt and short on savings, but lack a plan to spend our golden years in comfort.
A recent Ipsos poll for Sun Life Financial Inc. shows nearly half of working Canadians fear they could outlive their savings, and that three-quarters do not have a financial plan. Even 23 per cent of those already in retirement say they are just making ends meet.
When the news is that bad, it’s tempting to ignore, but there’s always hope 2020 will be the year to get a retirement plan on track – even if you’re already in retirement. It’s a long and detailed process, but it starts by determining your net worth and continues over time by setting net worth benchmarks to monitor your progress. The measurement of net worth is basically assets (equity you own) minus liabilities (debt you owe).
The results could be discouraging at first but net worth lets you know exactly where you stand financially. Here’s how you can determine your net worth.
Gather your liabilities
Bad news first. If your goal is to increase your net worth, half the challenge is keeping your liabilities low (see formula above). Any retirement plan starts with adding up the damage, and when you’re talking about finances, that damage is debt.
Most of us already know the median Canadian household owes nearly $1.80 for every dollar it takes in, but that’s a metric for the banks to gauge whether they can keep those regular payments flowing into their vaults. It doesn’t consider how deeply in debt we are, or at what interest rate we are servicing that debt. Interest on household debt ranges from 30 per cent on retail credit card balances to three per cent for a mortgage.
Only you can really know how much debt you have at any given time.
Tally your assets
If your goal is to increase your net worth, the other half of the challenge is growing your assets. While the definition of debt is pretty straightforward, assets can be open to interpretation. As an example, a motor vehicle is technically an asset but quick depreciation makes it a bad one. In most cases, though, it manages to retain enough value to cover the balance on a car loan as it declines. It’s probably most realistic to consider a vehicle, household appliances – or that Beanie Babies collection – neither an asset or a liability.
When setting a net worth goal, assets that hold or grow their value are the ones that count. Include savings in registered retirement savings plans (RRSP), tax-free savings accounts (TFSA), company pensions, and any other savings vehicles.
Assets also include the appraised value of the family home and any other real estate owned by the family. Include the entire amount if you are measuring household net worth or your ownership portion if you are measuring individual net worth.
Business owners can also include their portion of equity in their businesses.
Works of art, or collections that hold or grow their value, should also be included.
Your net worth
Net worth varies wildly across the country from young families struggling with student debt and large mortgages, to billionaire dynasties. The dollar figure – negative or positive – doesn’t matter as much as which direction it’s heading. Once you determine your net worth, record it on a spreadsheet and leave space for future entries when you tally up your net worth on the same date each year.
For net worth to grow, asset growth must outpace liability growth. Put another way, total debt could increase as long as assets grow more. A net worth plan is normally two simultaneous plans: debt reduction and asset appreciation.
Debt reduction is as simple as paying it down over time, but the process will move much more quickly by consolidating high-interest debt into one low-interest loan. Mortgages usually have the lowest interest rates because they are secured by physical property, and that’s where a home equity line of credit can come in handy.
Growing assets is much more complicated. Like debt, it requires a regular funding commitment, but it also requires an investment plan that produces consistent, reliable returns over time. That’s a tall order for the average person, so it might be best to also start 2020 with a visit to a qualified investment advisor.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.
