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Running Out of Money: How To Handle the Risk

You want to save enough money to retire well but not so much that you are sacrificing quality of life while you are young and raising a family.  Some in the financial industry recommend saving more 20% or more of your working income. It’s not wrong to encourage people to save, but as we’ve talked about on this blog, if you save too much, it means you will have to make real sacrifices when you are younger and raising a family.  Canadian financial experts like Fred Vettese and Malcolm Hamilton believe this number should be closer to 10%.

There are ways to reduce the risk of running out of money without over-saving.  Let’s look at some possible solutions.

1. If you can, 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.  This is easier said than done in today’s housing market.   However, things can change.  When I was in university in the late 1980’s, housing prices were arguably more expensive than today based on prices to average income.   That all changed a few years later.  For example, the  home my parents bought in 1990 in Markham, Ontario was purchased new for $640,000 in 1988.   My parents bought it  for $575,000 in 1990 and sold it for $460,000 in 2005.  Hard to believe but housing prices in the greater Toronto area don’t always go up.

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.  If you need some expert help, consider hiring an accountant or financial planner on a as needed basis to review your financial situation.  Paying the typical 2% in fees to a planner is very expensive and will make it harder to retire well.

3. Keep your employment skills sharp. If you stay valuable to an 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 among 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 $14 or $15 an hour part time can add up to $15,000/year.