New Thinking – The Merits of Postponed Retirement

My Dad retired in his late 50s when I was still in high school.  For the 18 years he enjoyed his retirement he always said that if he had known how fun and affordable retirement would be that he would have done it ten years earlier!  As a result, the idea of early retirement is not foreign to me.  I remember saying to Malcolm Hamilton in my early days at Mercer that I too might retire early.  Malcolm advised me that you either have to work hard to retire at 55 or work with a more modest effort and retire at 65.  I think it was a shot at the fact that I didn’t meet the Mercer standard of ‘hard worker’ in those days.

Fast forward 30 years and now family and friends are starting to retire in their mid-50s.  Except for Pat, Steve, and Pete who sold the business they built, most of these freshly minted retirees are exiting the workforce courtesy of a defined benefit plan.  I argue that generous early retirement benefits in DB plans are an outdated social policy as they both encourage workers to stick around long after their best before date in order to make it to early retirement and at the same time these provisions push highly productive workers out because the economics of working for 30 cents on the dollar just doesn’t make sense once you can cash in on an unreduced pension.

Ignoring the small DB pension that I left behind at Mercer (because I wanted the contingent right to future surplus which seemed like a realistic idea in the 1990s) I live in a DC world.  In our house we have been saving hard for 25+ years and we are just now starting to see our nest egg grow beyond what I would have predicted we needed when we started two plus decades ago.  But I worry that we still fall short of what is really needed in these modern economic times.  I have written before about retirement readiness and the power of annuities to help build confidence in the affordability of retirement.  I won’t go over these again today.

What I have been grappling with lately is the two-fold problem of whether I can afford to retire and whether I am mentally and emotionally ready to be retired.  On the second question I am starting to conclude that I wouldn’t be nearly as happy being retired as I am working.  To understand my current view, you have to remember that I have the luxury of working with interesting people on interesting problems and although I certainly juggle my schedule to fit with others, I essentially get to do what I want everyday.  I am not saying this to brag, I am sharing this insight so you have the context on why I might not be completely crazy to keep going even if Dean, my personal actuary, advises me that I am financially ready to leave the building (that advice not yet given).  I know not everyone loves their jobs – so this post is mostly for those that do – which surprisingly is a large percentage of my readers.

Last month, the CD Howe Institute sent a memo to Canada’s Minister of Finance.  The message?  Government needs to raise the RRSP limit from 18% of pay to 30% of pay.  I have no doubt in the math that under pins this advice – but I think the math has led to the wrong conclusion.  What everyone should realize is not that the government should let them save more but rather the amount of saving they need to do these days to retire in their 50s isn’t sensible for almost every Canadian in the private sector.  The only workers that can afford to save 30% are the government workers who save 10% while pretending that the 20% the government is saving for them is really only 10%.  Refer back to an earlier post on how everyone is duped by substituting the benefit of ‘investment risk’ for good old-fashioned cash.

What we need to do is to start to send workers the message that only the special few will get to retire in their 50s.  For the rest of us it will be our 60s and for some – on purpose or by accident, it will be in our 70s.  We also need to stop framing retirement at 65 as a ‘failure’ to save enough and start to talk about retirement in the last half of our 60s as a perfectly legitimate retirement plan.

Talked about for years, the biggest opportunity that we have to help workers that might be ready to retire and employers that are going to need skilled workers in the future is the idea of phased retirement.  As I get older, I see the dichotomy of the folks that want to work but can’t find any, and those that have a great job but can’t find a way to slow down.  We need to build a culture where greater chunks of vacation are an option, so it isn’t an all or nothing deal.  My buddy Rick is a commission salesperson and is working to phase from 100% to 0% over 5 years – smart for him and his employer.

The other thing phased retirement does is it lets you spend some of your retirement dough while you still have future income to earn.  This might sound like some math trick where 2+2 and 3+1 both equal 4.  But here is the magic, as explained to me by my still not quite retired friend René.  If you fully retire, then you have lots of time to travel but you also have to worry if you can afford it.  In contrast, if you travel on an extended leave from work, then when you get home and go back to work, you are still working and building your nest egg.  At the same time you now see more clearly how much more money you need when you fully retire since you more clearly see the cost of travel at the style you desire and you have knocked a trip off the list that doesn’t have to come out of your post-retirement savings.  Finally, exhaustively explored as of late, postponing retirement lets you postpone your CPP benefit giving you more inflation protected lifetime income to help pay the bills in the long run.

Phased retirement is genius – so why isn’t everyone doing it?  Many employers are still built around a desk or a manufacturing line and a 40-hour work week.  One desk, one job, one person.  We have dabbled in flexible working arrangements – but it isn’t the rule as much as the exception.  But this will change – technology enabled virtual work will eliminate desks and their mythical chains – and for good or for bad the idea of the gig economy and contract work will continue to grow.  It may seem today that employers have the upper hand when it comes to contract workers – but I expect this balance of power to shift as the baby boom retires and the workforce cannot keep pace with worker demand.

Watching my kids and their friends search for meaningful work-life balance, I am already seeing a desire in their cohort to break free from the corporate 9-5, so why can’t a worker in their 50s and 60s do the same?

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc, has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

2 Comments

  1. Avatar Mark Newton says:

    Increasing the RRSP limit would disproportionately favour the higher-paid.

    Increasing the TFSA limits would benefit all income groups and would provide greater flexibility to plan for and provide income in retirement.

  2. Avatar Shawn says:

    The idea of retiring at 55 is really very new and you can thank the very successful advertising of London Life that planted that seed. It really took on a life of it’s own in my time. That being said the savings rate these days for Canadians is one of the lowest in the world. We really need to change that.

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