RISCARIO INSIDER: WILL YOU HAVE FINANCIAL FREEDOM AT 35, 55 OR 75?

November 24, 2013

WILL YOU HAVE FINANCIAL FREEDOM AT 35, 55 OR 75?

Let’s dream. Imagine retiring early with nary a financial worry. What's the magic age? We’ll explore 35, 55 and 75.

Freedom 35

Julian: I’ve got a plan, all right. It’s called a Freedom 35.

Bubbles: What’s a Freedom 35?

Ricky: You’re not going to believe. This is perfect. Julian’s got these guards on the inside that are going to smuggle in a bunch of dope that we grow, sell it for big money in there and then we can retire and never have to break the law again.

This early retirement plan is from the Trailer Park Boys (Season 2, Episode 1). Not recommended.

Very few can afford to retire at 35. Suppose you could. What would you do with the rest of your life even if you live outside a trailer park?

Freedom 55

I never quite understood the Freedom 55 ad campaign by London Life in the 1980s. The idea seems to be buying their products (perhaps whole life insurance) would magically to build up enough savings to let you retire at age 55.

To paraphrase Bruce Springsteen, a dream that doesn’t come true is a lie … or something worse. Was early retirement possible for typical buyers?

Who really retired? Probably the advisors --- on money they made from selling the products.

I grew up in London, Ontario where London Life was headquartered. At Western University, I was taught by actuaries from there and received The London Life Continuing Actuarial Scholarship.

I wanted to believe the dream. When you're in your 20s and 30s, age 55 seems so far away. Being able to retire at 55 had appeal and might have been achievable with a good job and a defined benefit pension plan.

Now people in their 50s plan to keep working after they retire in their 60s, often to supplement their income (Huffington Post, Aug 2012).

Freedom 75

Retirement ages look like they’re getting closer to 75 than 55. We're living longer than ever. That means our money must last longer. Even if we're saving enough based on rosy projections, the investment returns may not materialize. Well-paying jobs aren’t secure. Also, we face unpredictable expenses such as health costs. We don't know what the government can afford to provide for us or for how long.

Consider the case of Tom Palone, who was a VP at Oral-B earning over $100,000 a year. Now 77, he works two physically-demanding part-time jobs paying $10/hour or less. He says, “I earn in a week what I used to earn in an hour” (Daily Mail, Sep 2013).

Where does that leave us? We might have children but there's no assurance they'll care for us physically or financially even if they can. Maybe you can keep working part-time if you’re healthy. Besides earning money, you'll have things to do. Decades of retirement can feel like a job too.

Your Situation

You can get financial projections that show how much you need to save to achieve a particular level of savings by a target age. Unfortunately, higher risk accompanies higher projected returns.

Life insurance is sometimes proposed as a savings vehicle since growth is tax sheltered as in an RRSP. Withdrawals are taxable but you can access the savings via tax-free loans. This assumes that you're comfortable carrying debt when you're retired. Even if you think you are, you may find that you really aren't. If you're borrowing against the collateral in your policy, the interest rates aren't predictable.

Insurers provide guaranteed lifetime income via life annuities. The payments are determined at the time you buy, based on your projected remaining lifetime and projected interest rates. Since we're living longer and investment returns are currently low, the annuity income looks less attractive.

Step One

To get a better understanding of your financial situation, get an independent review by a fee-only financial planner who doesn’t sell any products or get any referral fees from product sellers. Fee-only planners vary in what they charge, ranging from hundreds to thousands. They may save you much more than that through lower cost investments and higher peace of mind.

You can get "free" advice from several advisors who sell investments or insurance, or claim to do real financial planning. You may have trouble figuring out the advisor's biases but don't be surprised if they recommend you buy more of something they sell. The investigation process is time consuming and the proposals may not be clear. A fee-only planner can help with the review and inform you of the options left out.

Whatever your target age, make sure you’re planning financial freedom for you, not your advisor.

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PS Financial freedom means little without health.

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