Your Money Month: Risks and challenges to consider when planning for your retirement
Bob Legend admits he didn’t properly plan for his retirement. Then again, life didn’t exactly go the way he had planned.
“My wife looked after all of that and when we divorced, it left me in the dark,” said Legend in an email to BNN. “Also, splitting assets and pensions that I hadn't anticipated, that certainly derailed me.”
Legend is retired and survives on what he describes as a very modest work pension that doesn’t cover much.
“I had always planned to work into retirement and hadn't anticipated that it might not be as possible and steady as hoped,” said Legend.
The 67-year old currently owns a two-bedroom condominium outside of Calgary, which has risen in value, and he has a line of credit; “a typical house-rich, cash-poor situation,” he said.
Legend’s situation has, in fact, become very typical for many seniors, according to many analysts.
“Seniors that are retiring, or are a few years into retirement, might be asset-rich. So, they have a house that’s paid off, but the actual portfolios that they have in RSPs or TFSAs or any potential pension income that they have may not actually be sufficient to cover the daily cost of living,” said Shannon Lee Simons, a certified financial planner and the founder of the New School of Finance.
“What’s happening is that they are having to readjust their expectations of what retirement was, which is hard.”
Simons is seeing a rising number of seniors who are taking on debt in retirement in order to maintain a certain lifestyle, which can lead to even bigger financial problems down the road.
“The way you are thinking about retirement when you’re 60 is the same way you should be thinking about retirement when you’re 80, because you don’t really know what’s coming down the pipeline in the next 10 years,” she said.
Sometimes, the financial strains seniors face aren’t the result of retirement plans falling short, but rather an unexpected rise in costs.
Malcolm and Peggy Harris had planned out their retirement as well as, if not better than most. They had contributed to RRSPs, Malcolm paid into a pension, and they had a strategy to carry them into their golden years.
However, the Harris’, who are both in their 70s, are also looking after their daughter, who is in her late 30s and has a disability.
“Our standard of living I would suggest is ‘frugal’ to say the least,” said Malcolm in an email to BNN.
The couple takes advantage of benefits and support networks to offset the costs associated with caring for their daughter. But long term, their current standard of living is simply unsustainable.
“We will be facing significant financial challenges as we age and need to plan for our daughter’s future care and housing,” said Malcolm.
The Harris’ family situation may not be considered common, but the financial burden they face is, as a growing number of older couples find themselves having to support their adult children for one reason or another.
Almost 40 per cent of parents say their millennial children are still somewhat dependent on them financially, according to a survey by the Financial Planning Standards Council. More than a third say their adult children are creating a financial strain.
“Seniors are facing rising debt like never before,” said Kelley Keehn, a personal financial educator with the Financial Planning Standards Council. “They’re lacking long-term savings, have longer life expectancies, and have less comprehensive pensions.”
Up to 15 per cent of seniors are entering retirement still carrying a mortgage or some other kind of debt, according to Keehn.
These new financial realities are leading some to consider alternative financial products and services in order to get access to cash, primarily through home equity.
While that may provide some short-term relief, financial planners warn that seniors need to approach these products with caution.
“If a senior goes this route, they really need to understand all the terms and conditions, fine print, what it’s actually costing them, and what the implications are to their estate,” said Keehn.
There are a number of options available specifically to home owners, including reverse mortgages and second mortgages, but those are often discouraged by financial planners because they can lead to even higher debt levels or the equity being taken out of the home.
“I feel like you eat into the equity of the house and at the end of the day, you may be left with not a lot,” said Simons.
The most popular by far has been the home equity loan, known as a HELOC (home equity line of credit), where the borrower’s house is used as collateral to secure the loan.
Recent data showed home equity loans have jumped in recent months. And the value of those loans now stands at a record $230-billion in Canada. The interest rate is lower than credit card rates, making it a more attractive option. But, when rates rise, so too do the costs of this type of borrowing, and that’s where the danger lies for people on a fixed income.
HELOCs might be a sensible strategy for some, but Simons warns seniors should only be using them as a last resort or in a cash emergency.
“I don’t think going into debt should be part of a financial plan in retirement, because you don’t know how long you’re going to live for or what potential larger issues you might [face],” said Simons. “You might need long-term care down the road.”
Simons believes a better alternative to borrowing might be to downsize your living space, which she admits can be a tough emotional decision.
“You can downsize, maybe you can rent [the basement]. There are others ways if you’ve outlived your assets that you can tap the equity or usefulness of your home without necessarily taking on debt,” said Simons.
Simons also recommends seeing a financial planner to learn more about the options available.
Legend said he considered a reverse mortgage, but eventually decided against it because of the higher interest rate. He’s now considering bringing in a roommate from his church to lower his living costs and exploring other options, as well.
“[I’m] looking to turn hobbies into work that stimulates my mind through retirement, but also that could bring in some income.”