Running Out of Money: How To Handle the Risk

The financial industry likes to scare people into saving more money than necessary. The pitch goes something like this: If you don’t save 15% of your working income, you may run out of money before you have the good sense to die. They do this because every dollar you save, they shave off 2 or 3 percent for themselves. It’s not wrong to encourage people to save more, but as we’ve talked about on this blog it means you will have to make real sacrifices when you are younger and raising a family.

There are ways to reduce people’s fear of running out of money and still not over save for retirement. You probably won’t hear any of these recommendations from banks and mutual fund salespeople.

1. Buy your home and have the mortgage fully paid off before you retire. In a pinch, the equity in the home can be converted to income.

2. Keep your investing costs low. Instead of purchasing high cost mutual funds that rarely beat the market, purchase low cost index funds instead. The cost differential is huge and can mean tens and possibly hundreds of thousands of dollars more for you when you retire.

3. Keep your employment skills sharp. If you stay valuable to your employer, you significantly reduce the risk of being forced out of a job before age 65.

4. Start collecting your Canada Pension Plan later in life. 65 years old is the standard age when most start collecting CPP. Each year you delay CPP, your payment increases 8.4%. So if you wait until age 70 to collect, your monthly payment will be 42% higher. Remember CPP is guaranteed for life and fully indexed for inflation.

5. Start collection Old Age Security later. Instead of starting to collect at age 65, wait until age 70 and your monthly payment increases by 21.6%.  The incentive to start OAS is not as good as CPP so it should only be considered for the very concerned (paranoid?) amongst us.

6. Consider part time work or small business after age 65. Many people find full time retirement less fulfilling than expected. You could find part time work in a field that you find interesting. Even earning $11 or $12 an hour part time can add up to $12,000/year.