The question may sound absurd but if you are a healthy Canadian in your 40s having a 40-year retirement is not just possible but very likely.
According to the World Health Organization, a male’s life expectancy in Canada is 80 and 84 if you are female. Let’s take the half-way point between 84 and 80 and say longevity will be age 82.
The median retirement age in 2011 was 63.2 for men and 61.4 for women. The half-way point will be age 62. It seems logical to calculate your retirement years as your life expectancy minus the age in the year in which you retire. If you retire at age 62 and expect to live to age 82 then you should save up enough money to generate income for 20 years right? Wrong!
Planning for your retirement paycheque is a lot more complicated. Life expectancy is a moving target. In Canada, we have increased life expectancy by 5 years over the past 25 years. Increased life expectancy has been consistent for decades and there’s no indication it will stop.
If we continue at this pace, we will add 10 additional years of longevity within the next 50 years. If you are in your 40s today, it’s quite reasonable to expect your life expectancy will increase from 82 to 92. But now it gets even more complicated. Life expectancy for a surviving spouse is longer than an individual’s. As long as one or both spouses survive, savings are required to support their retirement.
The headline on today’s blog so perfectly sums up the subtle difference between “Retirement” and “Financial Independence” (aka “Findependence”) that I felt compelled to devote a whole blog to the idea.
Ardrey, who is with T.E. Wealth, seems to view the topic of Financial Independence just as we do on these sites, even down to the basic principle repeated often in the book to which our sister site (FindependenceDay.com) is devoted. In Findependence Day, one of the two financial planning characters, Theo, tells his young clients more than once: “The foundation of Financial Independence is a paid-for home.”
Here’s what Ardrey tells clients just starting down the road to Financial Independence:
I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.
Even Ardrey mistook FI for Retirement early on
Ardrey and I have followed each other on Twitter for some time. Ardrey posts as @MattArdreyCFP. But it was only recently, in response to something on one of these sites, that Ardrey casually dropped the fact that he’s been preaching Financial Independence (as opposed to traditional Retirement) to his clients since he entered the financial planning business at the turn of the century.
He noted that the financial planning software used at the financial firm where he got his start did not have a retirement calculator. Instead it had an an analysis tool on “Financial Independence Needs.” At the time, being new to the business, Ardrey thought it was just a fancy way of referring to retirement planning but as the years progressed, “I would soon discover that financial independence was something else entirely.”
So, to return to the headline today, what exactly IS the difference? Here’s the key passage:
Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.
It’s all about Freedom of Choice
This is of course pretty much what I’ve been saying, or at least the characters in the book and ebooks: “When you’re financially independent, you work because you want to, not because you have to (financially speaking).” And that’s exactly what Aubrey tell his clients:
The main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.
Some real examples
So far in this blog, I’ve reiterated Ardrey’s views. I want to close with some examples closer to home. I can think of a few friends or family members who are “retired, but not financially independent.” One couple in particular comes to mind: they do not work and live entirely on government largesse: some combination of CPP, OAS and GIS. Once upon a time they owned a home , a cottage and a car but today they rent a small apartment above a store. They have time freedom, yes, but no financial freedom. They depend entirely on the one source of income from the Government and if that dried up, I don’t know what they would do. Even with it, they are severely constrained in what they can do. So they are indeed “retired, but not financially independent.”
For the opposite situation, I need look only in the mirror. My wife and I choose to continue to work, and keep deferring future income sources that could be taken now if we chose: employer pensions, CPP, drawdowns from registered and non-registered investments, etc. Our home was paid for early in the 1990s, our cars are paid for and we have no debt. We are in fact financially independent but NOT retired, paradoxical as that may seem.
And finally …
Today is Boxing Day and I will probably CHOOSE not to do much more work on these sites, or for paying clients, until the New Year begins, apart from a few pre-arranged pieces and guest blogs. I wish all readers a very Happy New Year. See you on the other side!
Via BC-based certified financial planner Fred Kirby comes this Marketwatch piece on ten things retirees won’t tell you. Several of the points may resonate with readers of this site, although of course our distinction between the terms “Retirement” and “Financial Independence” may make some of the points moot. We may riff off this list at some point in the future, but in the meantime also check Monday’s guest blog by Matthew Erdrey on a similar theme, and watch for a similar post on Boxing Day.
Below is Marketwatch‘s list of ten; click through on the above link for the complete piece:
1.) We’re broke.
2.) Retirement is more stressful than it looks.
3.) We spend too much time by ourselves.
4.) We’re in denial about our health problems …
5.) … and our health costs are huge.
6.) We’re coming after your jobs.
7.) We still get frisky.
8.) We’re planning to move in with you.
9.) That big Hawaii trip? It’s more like a pipe dream.
McLister says new limits on government-backed mortgage funding will make it costlier for lenders to fund mortgages, or new underwriting rules will make it harder to qualify for mortgages.
2.) Record discounts for variable mortgage rates:
By the end of 2015, some lenders or brokers will be advertising discounts better than prime minus 1%.
3.) Brokers will break into there camps:
These will be full-service, online mortgage brokers and everyday brokers. The latter will be uncompetitive versus other brokers, banks and credit unions, McLister says.
4.) A glut of private money:
Alternative lenders like Mortgage Investment Corporations (MICs) will thrive as investors chase higher yields and the abundance of capital will tempt sub-prime lenders to take more risk. McLister expects that as a result some will offer mortgages with only 10% or 15% down instead of the traditional 20% or 25%. As a result, consumers will have more lending options at lower interest rates.
5.) Brokers will pitch you other stuff:
Expect cross selling of everything from GIS to insurance, credit cards and RRSPs.
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