It’s supposed to be the time of life when you enjoy the fruits of your entrepreneurial labour—taking the time to travel, enjoy hobbies, spend more time with the family—activities that were often impractical or outright impossible when you were working day and night to operate and grow your business.
But a recent CIBC poll sheds light on a troubling reality: most Canadians lack the necessary funds to retire comfortably. Some may not have enough to retire at all.
The survey found that a whopping 32 per cent of Canadians between the ages of 45 and 64 have nothing saved for their golden years. Those who have banked money reported saving an average of approximately $184,000, while 19 per cent of those polled said they’ve put away only about $50,000. Even if these sums were properly invested in a well-managed portfolio, it wouldn’t be close to enough to fund even the most modest retirement.
Indeed, CIBC projects that Canadians will require savings of approximately $756,000 to retire comfortably. But given the reality of life expectancies, the need for emergency funds and even the financial burden many parents will face in providing financial aid to their adult children—a major consideration that many people overlook—even this seemingly healthy figure may grossly understate most individuals’ retirement needs.
Aging Canadians were presented with an even more sobering statistic in a 2014 report from the Canadian Institute of Actuaries. It noted a demographic trend that accounting, insurance and finance industry professionals have had on their respective radars for years: Canadians are living longer; in some cases, much longer. As the report states, a 65-year-old couple has a 25 per cent chance that one spouse will live to age 97, and a 10 per cent chance that one could live to 101.
That we’re living longer is an undeniably positive development. What isn’t is the fact that many of us could wind up living in near-poverty because we haven’t taken steps to shore up our retirement finances. Many experts are calling this a full-fledged longevity crisis, and we tend to agree. It’s especially challenging for entrepreneurs who usually lack pensions, often experience fluctuations in income—at least in the early start-up and growth phases of their business—and can be financially vulnerable to sectoral and economic fluctuations such as market disruptions or major recessions.
If one of these incidents were to occur just as a business owner/operator was readying to retire—as was the case for many entrepreneurs during the Great Recession of 2008/09—it could wreak havoc on their agendas, potentially even forcing them to shelve retirement and business succession plans altogether.
The simple solution is to start saving and planning for retirement as early as possible, but that’s not always feasible when life and the financial needs of a young business get in the way. Most entrepreneurs only begin saving for retirement once their business reaches maturity—if they save at all.
Not sure what to do if you’re nearing retirement and realize you have only limited (and possibly inadequate) financial resources? Don’t panic. There’s always time to make the necessary (if difficult) changes that can help turn your retirement dreams into reality.
It starts by taking these very practical steps:
Check spending—Review 100 per cent of your expenditures over several months and analyze where most of the money is being spent. Take the information from your online banking statements, then categorize each expenditure in an Excel spreadsheet or in your accounting software. Now, ask yourself: do I really need to be spending on some of these discretionary items? If not, cut them out. If expenditures in areas such as rent or mortgage payments are preventing you from saving, it might be time to move or downsize to something more affordable. Approach this process objectively and with an open mind and be prepared to make changes.
Set a plan—As we’ve seen in recent studies, approximately 75% of Canadians lack a long-term financial strategy. This is a huge risk area for entrepreneurs, many of whom are meticulous in strategizing around the growth of their companies, but don’t bother to put the same effort into organizing their personal finances. Meet with key members of your personal financial team (assuming you have them, and you should) including your portfolio manager, chartered professional accountant and financial advisor (it can help to have the three in the room at once to ensure you take all relevant financial perspectives into consideration) and develop a customized strategy that takes your short- and long-term financial needs into consideration. Determine how much you have now, how much you think you’ll need in retirement, and outline what your retirement plans will be. Your plan should also include an approximate timeline that estimates when you’ll begin drawing Canada Pension Plan and Old Age Security benefits, as well as when you plan to sell certain assets such as a principal residence, among a host of other considerations.
Be generous when it comes to estimating longevity. Build projections on the assumption that you or your spouse (if applicable) will live to the age of 100. Even though statistics say the average person won’t achieve centenarian status, this is a reliable way to stress-test your finances and ensure you’ll be financially secure well into retirement.
At this point you should also review how your business is structured (e.g., as a sole proprietorship, a partnership or a corporation) and consult with your team of professional advisors to outline the most tax-efficient options to maximize after-tax income based on your specific circumstances. Even with the federal government’s new rules to curb the growth of passive income and limit income sprinkling from within a corporation, there are still many tax-effective strategies available to entrepreneurs looking to maximize their pre-retirement savings.
Start saving—After outlining expenditures that you can immediately curb, place the leftover funds in a savings account, a tax-free savings account—which is a highly effective, tax-efficient option if you have contribution space available—or a balanced investment portfolio. What’s important at this stage is to start making saving a habit, or to increase the amount that you’re already putting away for retirement to ensure savings align with your lifestyle goals.
Get disciplined—Allocate at least 10 per cent of your gross pay to savings. That may seem like a burdensome amount, but putting away a fixed sum each week or month (even quarterly, depending on how you pay yourself) and not touching that money is a practical way to ensure you eventually hit your retirement savings target.
And no, it’s never too late to start this process. We’ve worked with clients who began saving in their late 50s and early 60s, all of whom still managed to build an adequate retirement nest egg. While this process will require hard spending choices, sacrificing now makes sense if it helps guarantee a prosperous, worry-free retirement.
Hartley Cohen, Partner