In a recent Healthcare of Ontario Pension Plan survey, over half of the people who are approaching retirement (those aged 55 to 64) said that they would have to delay retiring if inflation keeps rising, while another survey found that 60% of people said they were delaying their retirement start date because everything had become so expensive.
We take a look at the reasons why Canadians are considering delaying their retirement, the pros and cons of making this decision, and how to avoid having to retire later than you’d planned.
Everything is getting more expensive
Inflation hit 8% in the first half of 2022, the highest level in Canada in over 40 years. This had a considerable impact on Canadians who are closing in on retirement. Firstly, it made pretty much everything 8% more expensive than the previous year (and none of the essentials are likely to come down in price in the years ahead).
Therefore, Canadian retirees have effectively seen the buying power of their savings diminish considerably. This could have an impact on how long those savings will last. If people feel that high inflation will mean that they could outlive their savings, they might be pressured into delaying their retirement.
In 2022, for example, inflation peaked at 8.1%, while the Canadian Stock Exchange fell by just over 8%. Many Canadian investors saw their savings lose value while the price of goods increased substantially.
As a result, it’s understandable that some people would consider delaying their retirement, so they could increase their savings and wait for inflation to cool off.
High interest rates have reduced Canadians’ capacity for saving
Back in early 2022, the Bank of Canada’s prime rate was only 0.25% (this is the interest rate that banks and other lenders use as a basis for their own lending rates). That rate has since increased to 5%, a large increase in a very short time frame.
Before the Bank of Canada started to increase its interest rates, Canadians could get variable mortgages for around 2% or less and fixed mortgages for around 3% or less. Similarly, the interest rate for home equity lines of credit (HELOCs) was as low as 2.95%.
Given that most Canadian mortgage holders sign up for five-year mortgage contracts, many of them have had to (or will soon have to) renew their mortgage at much higher interest rates, many of which could be double the rate they were paying previously.
Depending on the outstanding amount left on your mortgage, this could cost you hundreds of dollars extra every month in mortgage payments, or even more.
Similarly, 27% of homeowners have a home equity line of credit (HELOC), whose rates have also increased by close to five percentage points (from around 2.95% in early 2022 to 7.7% in early 2024). Given that Canadian homeowners average around $70,000 in HELOC debt, interest payments alone could have increased by as much as an extra $3,300 per year.
If they have a mortgage or HELOC as they approach retirement, this could cause many people to rethink their retirement date. When expenses increase as rapidly as this, you need to cut back on spending elsewhere to balance the books. Discretionary spending (the non-essentials, such as eating out, taking vacations and buying clothes) is usually the first to go, and putting money into savings can be the next to suffer.
A recent poll discovered that 52% of Canadians feel unprepared for retirement because they don’t have enough money left over at the end of the month to save. The same survey found that 65% of people felt that it was less likely that they’d be able to contribute to their RRSP or TFSA because of increased costs.
A volatile stock market can cause anxiety
The stock market has been anything but stable over the last few years, and investors saw their investments’ value frequently yo-yo. For example, by the end of 2023, the S&P 500 (the index of around the 500 biggest companies in the U.S.) had only just caught up to its peak from the end of 2021. On average, any investors holding shares or investments in this index saw no gains over that two-year period.
And by the end of 2023, the S&P/TSX Composite Index (which tracks Canada’s biggest companies) hadn’t made up for its losses since its high in early 2022. Given that most investors have a large proportion of their portfolio made up of equities (stocks), it’s not surprising that recent volatility, along with investments losing value, have made some Canadians consider delaying their retirement, at least until their investments recover sufficiently.
The pros and cons of delaying your retirement
While it probably isn’t many people’s ideal scenario, waiting a little before quitting work can bring some key advantages:
- If you wait until you’re 70 to start drawing government benefits, you’ll receive an additional 42% of Canada Pension Plan (or Quebec Pension Plan) and an additional 36% of Old Age Security payments, for life.
- You’ll have more time to save, and investments have longer to grow.
- You’ll have fewer retirement years, so you’ll be less likely to outlive your savings.
- You get to hold on to valuable work benefits for longer, such as health and dental benefits, and also contribute more to your company pension plan.
- You maintain a work routine and social life for longer.
Delaying retirement certainly has some down sides as well, especially if it’s forced upon you:
- You’ll have less time to enjoy your retirement.
- You won’t get to enjoy as many “healthy” retirement years, when you’re able to enjoy travel and more physically demanding activities.
- You won’t have the freedom that full retirement brings.
- You may have to work longer in a job you don’t love.
- Health issues could make it difficult to continue working.
How to avoid delaying your retirement
Regardless of what’s happening with the economy, the stock market and inflation, it’s crucial to have a retirement plan as part of your overall financial plan. A retirement plan will factor in all of the elements of your retirement finances, including:
- Your income from the Canada Pension Plan/Quebec Pension Plan and Old Age Security.
- Any income from company pension plans.
- Potential retirement income from your investments and other savings.
- Your expenses.
- Other costs (such as trips/vacations).
A good retirement plan will also be geared towards your chosen retirement date, so it will include how much you’ll need to invest to be able to afford to retire on time. A really good retirement plan will take into account any possible future variables, such as rising inflation, a volatile stock market or higher interest rates. That way, whatever happens, you should still be able to retire when you want to, rather than when market conditions allow you to.
The IG Living Plan is a comprehensive financial plan that takes into account every aspect of your financial life, including your cash flow, investments, being prepared for the unexpected and creating a robust retirement plan.
If you’re a business owner, the Living Plan will also help with ways to be more tax efficient and maximize your business’s success, as well as working out the best strategy to have your business provide retirement income. Again, the living Plan will take into account possible eventualities, so that even if interest rates jump, denting your bottom line, or inflation increases your expenses, you’ll still be well placed to retire on schedule.
If you’re worried that recent market and economic activity could delay your retirement, talk to your IG Advisor. They’ll be able to advise you on strategies to ensure that you can still retire on time or suggest ways to minimize the delay as much as possible. If you don’t have an IG Advisor, contact one today. They’ll be able to give you a realistic retirement date, based on your financial situation, and help you work towards that goal. You can find an IG Advisor here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
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