Financial: Are You Ready For Retirement?

While the popular view of retirement suggests that most people are heading off to the golf course as soon as their kids leave home, baby boomers as a group still seem poorly equipped for retirement. Most have financial plans and some assets, and few have really thought what they'll do with their time when it's not focused on work.

In fact, many people approaching retirement would delay it if they could just ease into it, suggests a recent survey by Washington-based Watson Wyatt Worldwide. One out of three workers aged 50 and up would continue working longer if his or her employer offered a phased retirement program, such as shorter work weeks or flexible hours.

Phased retirement. Watson Wyatt's survey found 57% of workers currently in phased retirement entered into the arrangement voluntarily. Of these, 42% said they enjoyed their work and wanted to continue, while 28% admitted they needed the money. The situation was quite different for the remaining group that had actually retired completely from their career jobs, only to re-enter the workforce. 40% of this group said they returned to work primarily because they were short of money, while only 34% returned to work because they enjoyed it, Watson Wyatt found.

Relatively few employers have established arrangements that would seriously prompt older workers to delay full retirement. And the companies that have tend to be quite large, Watson Wyatt warns. Either way though, few of these workers seem to grasp the tricky financial challenges ahead of them.

Reduced benefits. For instance, many employers cut back or eliminate benefits for phased retirees, just as they do for part-timers. More than half reduce or eliminate life insurance benefits, while a third cut disability insurance, Watson Wyatt cautions. Government benefits such as the Canada Pension Plan can also be affected, particularly for those who were previously out of the workforce altogether or have a string of lower-income years from child-rearing days.

The reality is that more and more retirees are going to need part-time income to buttress the typical three-legged stool of retirement income - government benefits, personal savings and employer pension plans. Increasingly, salaried income will constitute the fourth leg of retirement, offering little solace to older workers who may not be able to work any longer or who didn't start saving earlier. In fact, many of these financially-strapped Canadians will face major obstacles in their quest to hold that job into old age, from lack of training to the ever-present possibility of declining health.

Outliving your money. The biggest fear for most people is outliving their money, the study suggests - exceeding taxes and health care, two other big concerns. And they're right to be worried. Part of the problem is simply that life spans have grown as corporate pensions have shrunk, making the economics of retirement more complicated.

Five years ago, 50% of major employers provided retirement security through defined benefit pensions that pay a set amount each month. However, the percentage of employers providing these plans is expected to drop sharply, with more organizations adopting the less risky defined contribution model, where the ultimate benefit is not guaranteed.

Creating retirement income. For early retirees, other retirement income options include trading down to a smaller home, thereby cutting monthly expenses and freeing up some home equity, or, once they reach their 60s, purchasing a reverse mortgage - with all the accompanying feelings of insecurity this often produces.

With a reverse mortgage you get a lump sum and make no monthly payments. The specific amount is 10% to 40% of the current appraised value of your home, based on your age and that of your spouse, and the location and type of home you have. The money you receive is not added to your taxable income so it doesn't affect Old Age Security or other government benefits you may receive.

Using home equity. Throughout the period, the principal on the loan remains unpaid and interest accumulates. The debt is repaid only when you sell your house or you die. Also, because of the long-term nature of these services, the interest rate will be higher than on a shorter-term loan or mortgage. This is typical in the mortgage industry - the longer the term, the higher the rate.

The simple fact is that whatever you borrow, you're going to owe close to double that amount several years later. Essentially, you're borrowing against the equity in your home. Of course, it's going to come out of your estate.

We can help you determine how much a reverse mortgage might yield, what specific costs are involved, and whether it is an appropriate and viable option for you and your family.

Article submitted by Velma Carroll, Ten Star Financial Services.

Phone: 905.634.8834
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