Don’t Make the Same Mistakes
Posted by Gail | Filed under Money Management, Saving
Baby Boomers are starting to retire and they’re not as good at it as they thought they would be. An underperforming stock market, record levels of debt, and a sense of entitlement have left many with a retirement income gap they’re scrambling to fill. But there is still time for YOU to do it differently. And just because there’s confusion now doesn’t mean you have to walk the same path. But there are also a few very important lessons in here for the generations who are following the Baby Boomers:
1. Having robust savings doesn’t count for much if you’re also walking around with a ton of debt. A Royal Bank survey found that 4 in 10 Canadians will retire with debt. I’m willing to bet, based on how delusional I’ve found people to be, that the number is higher. A subsequent survey reported in the Globe and Mail found that 62% of people plan to retire with a debt load. That’s a little more in line with my thinking.
The lesson: your balance sheet must balance. It’s not just how much you have saved, it’s your overall net worth that really paints an accurate picture.
2. We used to aim to have our mortgages paid off by the time we swapped paycheques for retirement income. An Investors Group poll found that 56% of Canadians with a mortgage do not consider paying it off as an important factor in deciding when to retire. So more than half of us think retiring with a mortgage is now okay. Is that because we don’t have a hope in hell of getting it paid off and we’re reconciled to being old and poor? If you’re living on less income, doesn’t having fewer fixed expenses just make sense?
The lesson: if you’re buying so much house that you can’t afford to pay it off during your working years, you’re setting yourself up to have a very stingy retirement.
3. If you can’t live within your means while you’re working, how the dickens are you going to do it when you’re living on a fixed income that is significantly less? Borrowing has made living beyond our means easy. Since most retirement income is predicated on receiving 30-50% less income, shouldn’t a body practice living on less so they can learn to be happy with what they have?
The lesson: You’re going to have a lot of demands on your money over your lifetime: retirement savings, educational savings for your kids, mortgage repayment.
Learning to be happy with what 50-70% of your net income can buy means when you transition into retirement you won’t be assaulted by the concepts of frugality. And in the meantime, saving aggressively and paying off your mortgage means you’ll have more financial security.
The Big Lesson: Don’t make the same mistakes your parents did. Surely you’re smarter than that!
July 23, 2012 at 8:02 am
Great point, one which we are taking to heart. In fact, we should have our home paid for in less than 12 years. We almost have a 6 mos. emergency fund, after which we will put 15% of our income into retirement. We also will pay for our last two children’s college educations as best we can without sacrificing our retirement or taking out loans. We are a bit behind, but thankfully we have come to our senses at ages 49 and 50 and hope to retire with a paid for home and lots of $$$ in retirement.
July 23, 2012 at 8:12 am
I felt so put down when I read this today.
I am a Baby Boomer who retired early from fulltime work about ten years ago. Now I work about four weeks a year just to fill in. I had no debt when I retired, had paid off the mortgage years before, had never lived beyond my means, and certainly never had a sense of entitlement. Feel free to walk in my path – it leads in the right direction.
July 23, 2012 at 8:40 am
Timely message. We just reviewed all of our finances, and made a plan to accelerate paying down our mortgage – right now it sits at 29 years, 3 months. With a few small tweaks we’ve got it down to 19 years, but I am aiming for something less than 15 for sure. I just returned to work after my second mat leave in 3 years, and I am anxiously awaiting my first real paycheque to start making these changes happen!!! We’ve already discussed trying to live on my “EI” salary as much as possible and just use the extra funds to make our financial plan a reality. Mortgage, retirement, kids education…when did I become an adult?!?
@ Linda – I hope to follow the path you chose, congrats to you!!
July 23, 2012 at 9:47 am
We’ll be mortgage free in less than 8 years, I’m 33. We did it by changing our payment to weekly and adding extra on that payment each week. The variable rate mortgage helped as well, some say now is the time to invest but we wanted our mortgage balance as low as possible so when rates go up it won’t affect us as much. We are also saving and investing, but look forward to the flexibilty that will come with having our biggest payment gone.
July 23, 2012 at 9:48 am
Thanks for the good reminders Gail! One reason I don’t want to move is that we’re on track to have our house paid off in our forties (turning a 25 year amortization into about 16 years), allowing us to save lots more for retirement and help with our son’s postsecondary education when the time comes (though we’re saving for that too).
Linda-there are exceptions to every rule/study/survey. Congrats on being a good exception
July 23, 2012 at 9:53 am
I figure I’ll be spending LESS on professional dues, clothing and transportation but probably MORE on medicine, entertainment and activities( a bit more more travel) and eventually housing (help in the garden, heavy lifting around the house) and taxis.
I bet those 2 numbers come within 10% of each other.
July 23, 2012 at 10:04 am
There are a lot of us who got started “late” got married, had kids and bought a house in our 30s. If you were very lucky- you were able to buy a house for under $300 000. Even with accelerated weekly payments etc… some of us are really pushing to get the mortgage paid off by 60. We are 42 with an 8 and 6 year old. We have $170 000 left on the mortgage and will hopefully be paid off by age 55 unless…. Hubby’s company shuts down and we have to relocate… then we pretty much need to start from scratch due to the increase in housing since we bought this place. ( trust me we wouldn’t be looking at top end) We’d probably look at another $50- $100 000. In the meantime we are topping out hubby’s RRSPs ( no matching from the company or pension for us) putting money into the RESPs and keeping up with daily expenses, kids activities, house and car maintenance. I can see why some enter retirement with a mortgage. It’s not always because of living a life of excess. There are days we look at each other and wonder how people do it. We don’t travel far, we don’t have all the electronics and we live in a 974 sq.ft house- If we do have to relocate– Oy vey—–
July 23, 2012 at 10:31 am
We won’t have a mortgage when we retire; it’ll be paid off when I’m 42. However, a mortgage payment vs. car loan payments when retired, I don’t know. Mortgage payments often have lower interest rates. I know many retirees who have car payments, and I’m not sure that one is better than the other. They don’t want to take a lump sum from their RRSPs because they don’t want to be taxed. To each their own. As long as you’ve done the math, know what your income will be at retirement, and know what you can handle, it’s your choice. On the other hand, I have another friend who can’t make ends meet now, and is retiring next year. She still has a hefty mortgage, and just spent a fair amount of money to begin her own business for when she retires… I’m not optimistic that it will generate enough income to cover her expenses let alone give her extra cash. She’s catering to a very small clientele.
July 23, 2012 at 10:38 am
That is why — at 42 with a 17 yr old and a 13 yr old, we decided NOT to buy when we moved across the country six years ago. The ridiculous increase in the cost of homes in the last 10 years has me wondering how people juggle everything. Our first home, purchased in 1999 was $74,000. Our second home, in 2001 (moved provinces) was $114,000. In 2006 we moved again, and houses were then moving to $300,000 and up — we weren’t making THAT much more money. So we rent. And sock away the difference. Our rent would equal interest payments plus taxes plus maintenance, so still, why would we buy.
We figure it’s easier to downsize once the boys move out, and then we can buy a small condo perhaps on the island or a place down south. No intention on retiring with debt. We won’t have a mortgage burning party, but our budget will be pretty straightforward.
July 23, 2012 at 11:04 am
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July 23, 2012 at 11:25 am
I can’t imagine living with debt let alone retiring with it. I know people who are near retirement age who are still living paycheque to paycheque and that is definitely not the life that I want! I learned most of what I know about finance from my parents, but sometimes I wonder if my/our parents actually practice what they preach.
July 23, 2012 at 11:52 am
I work in HR and we were recently trying to figure out how to downsize our staff without laying staff off. One suggestion was part time work. I was a so sad when I kept hearing over and over from staff in their late 50’s that they couldn’t afford to work part time. They either still had big mortgages or took their adult (now divorced) children who had their own children back into their homes.
I decided right then that I never want to be in that position and revamped my entire budget and savings strategies.
Having savings is freedom. To work…to not work…to travel…that is where I want to be.
July 23, 2012 at 12:16 pm
For the most part I was a stay-at-home Mother most of my married life or else I worked part-time. My husband has worked very hard for his family. He is now 60 and I am really working at saving most of my income now so that he can retire at 62 as my gift to him. I work 4 days a week and even though the pay is low we were used to living on one income for all of our married lives even when I worked. I plan on working until I am 65. We have no debt and no mortgage. We have no pensions either other than Gov. pensions. I find it almost fun to see how much I can save. Any extra money goes into an early retirement fund, for example leftover grocery money that I had budgeted for, service charges that we used to pay on our banking a/c (I had to find out that for myself – when my husband turned 59 – no service fees- thanks for letting us know after paying for 6 months that we didn’t have to.) I am downsizing phone service and shopping for Christmas presents now. I have health benefits at my work which really help also. It is amazing how much you can save if you put your mind to it and live simply.
July 23, 2012 at 2:14 pm
@Debbie – I like your philosophy. Simple living is a joy..
July 23, 2012 at 6:33 pm
I write this with hesitation Gail but I have a lot of growing resentment towards “baby boomers”. I read those pitiful statistics, and it makes me feel deep sadness for the generation that preceded mine.
When you look at the scandals like LIBOR, and combine it with these statistics, we have a generation that operates with such fiscal ineptness entire Nations are on the verge of collapse.
It’s disturbing to the core that not only do we not accept fiscal responsibility for ourselves, we allow white collar crime to go ballistic on our most personal freedoms, again with nearly zero consequence.
It seems like a borderline intrinsic state to consume, ignore, repeat.
Thank goodness you’re fighting for the good guys Gail.
July 23, 2012 at 8:37 pm
36 with about $150K left on our mortgage, with 2 kids, 6 and 3. We had wanted to pay off the house by the time we were 40, but a bit of bad luck with daycares meant we were paying $400 more a month in daycare than we had budgeted. We also had our car break down right after paying for a major house reno, which caught us off guard a bit. But we’ve been disciplined and any extra money we’ve earned has gone back to debt repayment. As things stand, I think we can pay off our house in about 6 years or so; we’d be 41 or 42. Our car will be paid off this year, and I’m hoping to get another 4-5 years of use out of it.
When I was younger I dreamed of having the big house, triple garage, granite and marble, man-cave, etc. I realize now that those things aren’t worth the debt they saddle people with. My house is plenty big enough for my family and I don’t want my children to be growing up feeling like they’re living a life of privilege.
I hope that once I turn about 45 or so, I will never have to deal with bad debt again. Cautious investments, maybe, but even then I think it would be very hard for me to go back into debt after digging myself out.
Money doesn’t buy happiness, but it does buy freedom.
July 23, 2012 at 11:31 pm
Donna- you said it perfectly! Savings buys freedom
I wish more people would get that before it’s to late
July 24, 2012 at 9:35 am
I agree with all of you about not carrying debt to retirement but you have to live too. I know many people who saved and worked hard to pay off the debt for retirement and either didn’t make it there or their health failed.
You have to live with a balance saved for the future but enjoy your life too. It nice to retire debt free but if you can’t keep it to as low as possible.
July 24, 2012 at 6:23 pm
I have now debt and save more than 50% of my take home pay. But in preparation for retirement in a few years, I’ve tried to live each month on the pension money I expect to earn. It ain’t easy and there are many monhts when I have to supplement by about 30% in order to get to the end of the month.
I’ll have to re-examine the rational for retirement from a good paying job with great benefits and super holidays.
July 24, 2012 at 6:24 pm
I have no debt and save more than 50% of my take home pay. But in preparation for retirement in a few years, I’ve tried to live each month on the pension money expected. It ain’t easy and there are many monhts when I have to supplement by about 30% in order to get to the end of the month.
I’ll have to re-examine the rational for retirement from a good paying job with great benefits and super holidays.
July 25, 2012 at 4:05 pm
I’m tired of the generalizations about “boomers”, how we feel we are entitled, buy whatever we fancy, are becoming a burden on the health care system, etc. I’m 57 and have no debt (also don’t own real estate) and have been working full-time and paying into the system for 39 years.