Is there power in postponing retirement?
Over the years of running this blog, I’ve had the good fortune to meet and speak with a number of very bright minds in the personal finance and investing space.
One subject that often comes up with these experts is the subject of retirement.
If you’ve done any thinking on this subject yourself, or in fact, you’re already retired you probably know the rules of retirement have changed over the last decade or so in particular.
- There’s longevity risk – many people are living longer and need to finance more years of retirement expenses.
- You have market risk – such as in our current days with this horrific COVID-19 virus triggering market meltdowns. This means, long gone are the days of healthy interest and savings rates via fixed income investments. You need to learn to live with stocks more.
- Last but maybe most importantly (given the anxiety we are all feeling right now with this global viral pandemic), there are psychological and leisure risks when it comes to retirement. I mean, going from 100% work mode to 100% leisure mode or other may not be sustainable nor desirable to keep a healthy mind (and body).
Retirement benefits in transition
Canada’s private sector has been migrating away from a defined-benefit pension system to a defined-contribution pension system over the last few decades. And it’s very easy to see why. Employers in a defined benefit pension system incur all the investment risk. Workers who have enjoyed a multi-decade contribution period to a secure, viable defined benefit pension plan have it made. Essentially cash for life…
Flipping the model to a defined contribution pension system essentially transfers the investment risk from the employer to the employee. And certainly based on the products and services offered by some institutions running those group pension plans, there is an abundance of new employer-related risk to be had.
Which, for the purposes of this post today, makes me wonder this:
why there is such an adoration for early retirement?
Here are some reasons why I believe there is great value in postponing any retirement.
On the concept of FIRE (Financial Independence, Retire Early)
I by FAR AND AWAY prefer any drive towards becoming financially independent vs. any sort of early retirement. I prefer and I’m personally striving for FIWOOT.
The concept of FIRE, really doesn’t jive with me because I don’t know of anyone who is a 30- or 40-something, who might claim to be an early retiree, that doesn’t make money off a blog, a podcast, a book (or more), or speaking engagements related to early retirement. If you know of anyone that does any of this stuff for free, please let me know. I would be happy to exclude them from any list.
Now, becoming a financially-independent-work-on-own-terms entrepreneur certainly doesn’t make you a bad person in my book. In fact, on the contrary! Kudos to you for following your passion and having the financial savvy to get there faster than most! Just please go easy on the heavy marketing and selling courses that some of you do on how to get rich quickly.
To paraphrase something that ABC’s “Shark Tank”, Canadian business mogul Kevin O’Leary said some time ago…
I achieved great liquidity and I thought to myself, ‘hey I’m 36, I can retire now’…but I was bored out of my mind.
You don’t need to go very far to read up on research that has found there are a number of number of health benefits linked to older-age retirement, including a decreased risk of dementia. Heck, some research has even referenced even if older workers dislike their colleagues, studies have highlighted these are far better outcomes for these older workers than any social isolation!
On the COVID-19 crisis and FIRE: it’s going to be a lot harder to retire early – that’s a good thing
I found this recent article by Tanja Hester, a notable blogger and personal finance podcaster in the U.S. very refreshing when she wrote about any impending U.S. recession triggered by this COVID-19 crisis.
Here are snippets from this article that really resonated with me:
“If anything, we should expect to see more people interested in securing their financial security permanently, most especially workers who are too young to have been scarred by the Great Recession in 2008-2009, an event that certainly pushed a great many of us who’ve already retired or who are pursuing FIRE to take their financial future into their own hands.”
“Everyone is a brilliant investor in a bull market, and so the last decade has allowed quite a few authors, bloggers, and podcasters to gain footholds as respected voices in the FIRE movement, whether or not their ideas were actually sound. The one positive effect of the recession will be to illuminate who has been giving out good advice, and who was just in it to cash in on a trend.”
And probably my favourite:
“The fundamental principle of FIRE is still true: If you spend less than you earn and invest the difference, eventually you will have saved enough that you can live off your investments forever. What was never true, and what is much more obviously untrue now, is that you can rush that process and cut corners, and still end up with an entirely secure plan.”
Beyond lifestyle benefits, postponing retirement can mean more savings and flexibility
On our home front, a fresh off the press publication by the C.D. Howe Institute this week concluded some other great merits in delaying retirement, yielding more systematic benefits for all.
The report that you can find here, for free, highlights:
- Our federal government should consider raising the allowable contribution limits in the defined-contribution system to reflect the fact that retirement at age 60 “requires a significant rate of savings during a much shorter working lifetime”. If, in the alternative, the government wishes to discourage retirement before age 60, then the first step is the elimination of the generous early retirement benefits available to many public-sector workers before that age. “Ultimately, the goal of equal outcomes in the defined-benefit and defined-contribution regimes should be restored”… Indeed.
- Ottawa, our government, should consider raising the age at which workers must stop contributing to tax-deferred saving vehicles and start receiving income from them to age 75 from the current 71. This would increase the age threshold for savers looking to defer their retirement and rebuild their nest egg after the recent market crash. “It would also give some breathing room to retirees forced to sell stocks at a loss to meet mandatory minimum withdrawals of their tax-deferred savings” – as in now.
- Ottawa, with cooperation from the provinces and territories, “should amend OAS and the CPP to allow for the deferral of income from these programs to age 75, with appropriate rates of increase in the benefit rates”.
Certainly the simplification of our financial regulations are a major opportunity for improvement. In times of crisis or otherwise.
Is there power in postponing retirement?
Absolutely. For many of us. For most of us. Maybe more so now than ever.
From the C.D. Howe publication:
“Saving for retirement is filled with great uncertainty due to unpredictable and volatile factors such as career wage changes, accumulated investment returns, retirement lifestyle desires, health conditions and longevity.”
Now, this is not to say that those individuals or families that have the vast financial means to retire or not work at all based on their accumulated wealth have to work. By all means, enjoy all the time you have earned through growing a business or other. You’ve managed to save, earn and be very, very fortunate more than most. What I am saying is for the majority of Canadians (or anyone else for that matter reading this), I would argue there are HUGE benefits to postponing full-on retirement and HUGE risks if you retire too early.
For me, I have no idea what the future holds. This crisis has certainly impacted me – and we’re just getting started to get through this. I’ve always believed some form of semi-retirement might actually be the perfect fit to balance my desire to remain purposeful, keep me engaged, while earning some income to combat whatever the future holds. I probably believe in that now more than ever. With stock markets behaving how they are only time will tell if I get to live any semi-retirement dream.
For many of us living through this time, I suspect the power in postponing retirement becomes a very, very easy case to make.
Please stay safe out there…
Thoughts? Is there merit to postponing your retirement? What about keeping any side hobby to ensure you have multiple income streams as part of semi-retirement? Do share in a comment.
This is your essential retirement income guide.
This is a beneficial retirement income blueprint to follow.
I think you should strive for financial independence (yes…for sure) but not early retirement.