Retirement. From someone who knows

HammockLast summer, at a BBQ, me and this retired fellow–let’s call him Tom–we stood chatting. Talk turned to investments, to the stock market and, finally, to retirement. When I pondered if retirement was as expensive as the so-called experts warned, Tom sort of chuckled. We talked some more, until I asked him if he’d jot down some common-sense, real-life thoughts about his experience.

Here’s Tom’s take on retirement…

Retirement

Knowing nothing of business or finance, my only tools for life or retirement were common sense and discipline. Paying $2 for an item that could be bought for $1 was wasteful but, when I reviewed my earliest spending habits, I found I was doing just that more often than I cared to admit. A little discipline improved that dramatically. “A dollar saved was worth much more than a dollar earned”.

My first instinct on receiving my first pay was, understandably, to go out, celebrate and spend. But then, I considered what costs had to be met before the next pay. I opened a bank account. The rise of its balance was slow and erratic. Banking charges of $200 – $300 annually were eating away its progress. Once I learned that banks would forego those charges if I maintained a minimum balance of about $2000, that became my first financial goal. It was a 10% to 15%/yr return on investment and “savings were the road to life’s goodies”, retirement was just a vague concept of a distant future.

Later, I got a credit card and treated it like accident insurance, something you want in case of emergency but hope never to need. I used it sparingly for things I was sure to pay off within the month, just to keep it active. I knew I’d be working for the bank otherwise, paying 20%/yr. or more on it. It wasn’t long before I wanted a car but resisted the urge to buy a new, exotic, or showy one. The most common car on the road would be most familiar to mechanics and their parts would be most readily available. I borrowed the money from the bank because it would cost less than my account would save once my first goal was met. A car is not an investment, it’s an expense. The best investment is a house, which I bought years later. It saved rent and its value increased. I do the maintenance and most of the repairs on both, being more willing to use my hands than my wallet. Services, even then, were consuming an increasing portion of incomes.

After seven years work, I got a job with a major corporation that had a defined benefit pension plan in which the company matched a portion of my contributions. It was invested for growth as a hedge against inflation, which historically averages, say 3%/yr. Supporting a young family at the time, I didn’t take full advantage of that opportunity until much later.   

We were spending about $5000/yr. at the grocery store. They, like most retailers, offer endless sales. If a non-perishable item bought monthly went on sale at 10% off, we bought six instead of one, which becomes a 20%/yr. return on investment, more than most investors make on the stock market. A freezer paid for itself in no time. The lessons, here, were that I should anticipate and buy in advance. Procrastinating to the last minute inevitably cost us more.

It seemed that personal finance and especially family finance required significant safety margins and flexibility. When (not if) something happened, my creditors wouldn’t be sympathetic nor would the government bail me out. Life’s risks had to be managed. Irrational fear would only drive me into the open arms of insurance companies willing to eat up my savings, which would otherwise increasingly become my insurance.

By the age of 50, down-sizing was creating havoc in the workplace; I was becoming less enthusiastic about my job and started to think more seriously about retirement. I started maxing out my allowable RRSP’s at the bank, first with GIC’s then Mutual funds. By 55, I jumped at a moderate but reasonable bridged retirement offer. My wife wanted to continue working to build her pension and we only had one daughter left at home, who was in her last year of college. I was able to put most of the termination package into RRSPs, but by leaving the company, I was then responsible for managing my pension, which until then I had mostly ignored. Fortunately, I had a friend who, not having a company pension, had started his own self-managed RRSP and showed me the ropes. I felt we could manage it.

The first year was tight with one daughter still in college. With my friend’s help, my improving understanding of finance started to pay off and, by 60, the Quebec Pension kicked in. I had signed up to the bank’s web service, which allowed me to follow my investments (or any other I may be interested in) on the market in almost real time. More importantly, it offered tools to analyze what the market was doing so I developed a more informed view of what’s going on.

Managed Mutual Funds had been costing me about 2% annually. If they earn the stock market’s historical average, say 8%, I would get 6%, which becomes 3% after inflation. Unmanaged ETF’s cost me about 0.5%, followed the open market on which they’re traded, and didn’t threaten penalties for early redemption. The difference between 3% and 4.5% net over time is tremendous. Active management can then yield another 1.5%, raising the net to 6%, double what unmonitored mutuals would. The combination of this and the termination package brought my RRSP’s back to where they should have been. Close monitoring and timely trading were the keys. In 2008 I lost 10% instead of 40% then, recovered much more in Canada’s quick recovery afterward. I’ve been lucky enough not to dip into my RRSP’s. In fact, since the advent of a retiree’s next best friend, TFSA’s, I’ve been able to max them out.

The effects of playing the market, like gambling, can be encouraging, even infectious, and you could go on to broader portfolios of stocks, buy on margin or become a day trader. That and more is possible and “potentially” more profitable but, the purpose was to maximize retirement savings not start another career. If finance interests you, occasional trading provides a light pastime, security monitoring of your investments and can provide extra income right through retirement. I watch the market and make a little while my wife watches the flyers and saves a little and everything works out nicely.

In retrospect, the cost of a child’s education or marriage should be provided for before retirement. Retirement shouldn’t be burdened with them, a mortgage, car payments or credit card debt. Credit costs money and is best suited to increasing incomes not diminishing incomes. And, retirement is best spent empty nested. That’s not something to lament over. Your children’s successful departure is your graduation as a parent. A 3 or 4-bedroom family home is not appropriate. It becomes too much work. Depending on your finances and interests a 2-bedroom single level bungalow or condo is more appropriate. If that’s a real-estate downgrade, it’ll provide a little more money for retirement. We had a 3-bedroom bungalow that I converted to two bedrooms, which we still find more than necessary. And, a comfortable car is more appropriate and cheaper than a family van or SUV.

Sipping on a half priced senior’s coffee, I can tell you that retirement living costs substantially less. It still amazes me how much was spent on clothes, gas, lunches and coffee going to work, never mind the unending stream of birthdays, weddings, babies and retirements that had to be celebrated there, or the ambushes for tickets and donations. I can’t say what the value or percentage of saving is. That would depend on your circumstances but, it’s consistently more than most think beforehand.