According to Gordon Pape, unfortunately, there is no easy response and no magic formula. There are a lot of variables. One of these variables is your lifestyle. If you think you can live a frugal lifestyle, the answer for retirement may be easier.
Many people think nowadays that they have to work pass 65. There are many reasons behind it: Debt is one of it. Retirement age at 65 was standard but not any more, many people plan to work until they turn 70.
According to TransUnion, consumer debt-not including mortgage debt-held by the average Canadian is $27,131 for 2013 or 3.47% increase over 2012.
There is a review by Bank of Canada in an article called: What explains trends in household debt in Canada http://www.bankofcanada.ca/wp-content/uploads/2012/02/boc-review-winter11-12-crawford.pdf
Consumers 65 and older are increasing their debt faster than any other age group in the past year. 6.5% increase in average debt for consumers aged 65 and over, according to Equifax. Seniors, who typically should be drawing on savings in retirement, are instead borrowing to support lifestyles they otherwise can not afford. Some may also be borrowing to support both grown children and elderly parents, according to Barrie McKenna of The Globe and Mail, Aug. 28 2013.
Gordon Pape established what he called "the Retirement Worry Index" as follows to help the to-be-retiree position themselves:
RETIREMENT WORRY INDEX
1. Worry Index: Very Low You work for a place that has a generous defined benefit pension plan sponsored by a federal or provincial government, the military, the police or a powerful union (e.g., teachers). You also have personal savings, own your own home and have little or no debt.
Strategy: You’re in great shape. Enjoy your retirement years.
2. Worry Index: Low You have a defined benefit pension plan from a corporation or a regional or municipal level of government. You have some personal savings, own your home and have little debt. You are probably in good shape, but there is a chance that your pension could be at risk, even though it is “guaranteed,” if the sponsor runs into financial problems. It happens: Nortel pensioners have been in a protracted battle to get at least some of the benefits they expected and the fight is still going on as this is written. In Hamilton, employees of U.S. Steel Canada were locked out in November 2010 when they refused to accept changes to the pension plan that would, among other things, end indexation for some 9,000 people who have already retired. This loss of pension rights used to be unheard of. But the Great Recession of 2008-09 changed a lot.
Strategy: Protect yourself by adding to your savings.
3. Worry Index: Medium You have a defined contribution pension plan, some personal savings, own your home and have little debt. A defined contribution plan does not guarantee a specific level of pension at retirement, but it is better than nothing, especially if the employer is matching your contributions. These plans are structured in such a way that you have your own personal pool of cash to invest in the many options that are offered.
Strategy: The amount of your pension will ultimately depend on how well your investments perform, so it is essential to pay close attention to that money and manage it carefully.
4. Worry Index: High You have no pension plan. You have some RRSP/TFSA savings but not as much as you think you need. You own your home and have modest debt.
Strategy: This is not a hopeless situation by any means, but it requires some immediate action. You need to pay off the debts and begin to boost your savings rate. The more years you have left until your planned retirement, the less of a financial strain this will be as long as you don’t procrastinate.
5. Worry Index: Very High You have no pension plan and limited RRSP/TFSA savings. You still have a mortgage and are carrying credit card debt. You’re probably thinking that a combination of the Canada Pension Plan and Old Age Security will provide for your needs. These will certainly help but unless you plan to scale back your lifestyle considerably, they won’t be enough.
Strategy: You need to pay off your credit card debt as fast as possible and then cut up the card so you don’t incur any more. Once that is done, direct all the money that went to the monthly card payments to an RRSP and use the refund to pay down the mortgage. Depending on your age now, you may have to postpone your target retirement date for a few years.
6. Worry Index: Extreme You have no pension plan, hardly any savings, a big mortgage, other debts and you’re supporting other family members such as an aged parent. This is a scenario that demands immediate attention.
Strategy: You should seek the help of a financial planner to get your affairs on track, but if you are within 10 years of your planned retirement age, your options may be limited. You may be forced to depend on federal income-tested programs such as the Guaranteed Income Supplement (GIS) to make ends meet after you stop work. If that appears to be a possibility, don’t put any savings into an RRSP because withdrawals count as income and will reduce your GIS payments. If you are able to save anything, use a TFSA instead. (http://www.everythingzoomer.com/whats-your-worry-index/3/#.UlIR-lCURGk)
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