04 Aug Will semi-retirement be your new normal?
You’ve done the math. And the message is clear. You don’t have enough money to fund your retirement and maintain the lifestyle you’ve come to know and expect.
You’re not alone.
Many 60-and-over Canadians are finding they need to keep working to make ends meet, especially if they want to maintain the lifestyle they had when they were working. Some have already retired and find they need more cash.
There’s a real concern they will outlive their savings: a growing number of people will spend almost as many years in retirement as they have spent in their professional career.
Semi-retirement is fast becoming the new normal, although I’ve yet to see it as an employment status checkbox!
What the numbers tell us
The funding you need in retirement depends on your lifestyle, of course. Some advisers say you need retirement cash flow equal to 70% to 80% of your peak pre-retirement income; others recommend a replacement ratio of 50% to 60% for couples, and 60% to 70% for singles, assuming you have a paid-for home and your kids are financially independent.*
Another way of estimating it is:
Typical middle-class Canadian couples can live comfortably on $42,000 to $72,000 a year ($30,000 to $50,000 for singles), again assuming no mortgage or child costs.*
HSBCs recent Future of Retirement report found that 45 per cent of working age people in Canada plan to semi-retire before they stop work completely, while 15 per cent expect that they will never be able to fully retire.
… “this latest research suggests that older Canadians and those approaching retirement age may also be feeling the pinch of under-employment at time when saving for the future is often at its most crucial,” said Betty Miao, executive vice-president and head of retail banking and wealth management at HSBC Bank Canada.**
Addressing the gap
It’s difficult to generate much income from savings in our continuing low interest rate environment. Investments with the greatest potential usually come with the most risk. And for seniors, challenging and well-paying employment opportunities are few and far between.
One semi-retirement option — you could buy a business that might work better for you than continuing to work.
“Many people may find that working in retirement as a small business owner will give them far more income than they expect and, if you are a good manager, far more free time than holding down a conventional job would allow,” says St. Louis business broker Jim Stauder.***
In his blog post, Jim details a scenario where buying an easy-to-run small business for $250,000, with a down payment of $50,000 and a profit to the owner of $100,000, is a good option for ongoing income.
Note that in applying this U.S. scenario to Canada, if you purchase a business that makes the owner $100,000, you would pay around $250,000, similar to the U.S. example. However, you could not buy the business with $50,000 down. You would require $75,000 to $125,000 to purchase a business that made $100,000 as our banks will not support a purchase with 20% down—you will need 30 to 50% down. This means that the amount the purchaser gets to keep from the business is higher and there is less risk as the payments are lower. But it also means the purchaser has to save more before buying.
Aside from the income, you would, of course, have an asset that is growing in value to sell when you are fully ready to retire.
Becoming a business owner at 66
Many of our buyers are professionals seeking a more rewarding and fulfilling life and achieving this by leaving their profession to become business owners. Some choose to work in the business; others hire a manager for the day to day.
The key is to buy an existing small business that’s proven itself in the market; the failure rate is very low compared to new start-up businesses.
When our Ottawa client Bill Kenney bought ROVIS food service equipment repair in 2009, he saw the business as a sound investment—much less risky than the stock market.
Bill, you see, had just retired after 35 years in scientific instrument sales, much of it on the road, covering accounts in Canada and the New England states. At 66, he wasn’t about to “sit home and read newspapers.”
“My friends thought I should just take it easy, but that wasn’t my modus operandi,” he recalls.
His experience in his previous career was in fact much like running his own business, he says. So he went looking for an established business that was locally owned.
Would your years of experience equip you for small business ownership? Consider all your options and get expert advice from advisers you know and trust.
* How much you really need to retire. David Aston. MoneySense
** Semi-retirement the new normal in Canada: Survey Lisa Wright. thestar.com
***Is Semi Retirement Better than No Retirement? Jim Stauder.