Learning Centre

Whatever Happened to Fom 55?

By: Lora Grant CFP, FCSI, CSA

Remember those Fom 55 commercials from years ago? The 'Spirit of Fom Future' goes back in time to inspire the younger version of themselves to take action in order to realize their dreams of a luxurious early retirement. Dreams of yachts and golf and smiling youthful retirees filled our heads like visions of sugarplums on Christmas Eve. Haven't seen any lately, have you? Is that kind of early retirement still possible?

Fom 55 is made possible by starting a dedicated investment and savings plan at an early stage and relies on the support of strong and steady equity returns. The two-year bear market experienced at the beginning of this century following hard on the heels of the technology bubble implosion reminded us that we cannot expect double digit returns year after year. Early retirement is a double edged sword: not only do you have a shorter working life to accumulate your assets, you will draw on them for a longer period.

Are we as eager to quit our jobs at a younger age? Our perception of retirement is changing and being redefined as the Baby Boom generation approaches it. With increased life expectancy, this stage of our life takes on a different aspect. We no longer see it as just play time for endless rounds of golf and other leisure activities. Now it can be our chance to start our own business, help care for an elderly parent, baby-sit grandchildren, do volunteer work or pursue an interest we previously never had the time for. More and more of us will transition into retirement through reduced work weeks at our current positions, consulting or contract work, or part time jobs. Many of us are increasingly concerned with having enough money to last through a phase in our lives that stretches out farther and farther.

Canadians seem in less of a hurry to retire. The median retirement age has actually increased since 2000 to 62 years old. Provincial legislation is moving away from mandatory retirement at age 65 as more people want or need to work longer. A surprising number say they will never retire.

The retirement phase of your life is not a simple constant expense adjusted for inflation as it used to be calculated. We are realizing that it is made up of different phases. The first stage of retirement may be a time of increased travel and activity that easily proves more expensive that originally estimated. That may be followed by a quieter period as a slower pace prevails. Then you may experience a degree of increased dependency on others, perhaps just cutting the grass and shoveling the snow or perhaps to feed you or get you out of bed. This stage of dependency can range from an extra few hundred dollars a year to remain in your own home with minimal assistance all the way up to retirement or nursing homes costing thousands of dollars a month. Planning for these various paces and possibilities is increasingly complex.

Other changes surround our chances for early retirement. Not many of us are doing anything about it. Roughly half of Canadians have some sort of savings for retirement, either through an RRSP or a Registered Pension Plan. Only 30% of those eligible to contribute to RRSPs do so. Of those, only a few actually contribute the maximum they are allowed. Interest rates are low and stock markets do not follow a straight line up meaning RRSP growth isn't as rosy as hoped for in the past. Pension plans are offered by fewer and fewer companies and those that do have them prefer the less expensive defined contribution type. That leaves the investment risk in the hands of the employees, many of whom seem to underestimate the importance of the investment decisions they make. We are seeing a widening gap in the degree to which Canadian families are preparing for retirement with lower income families falling father behind. Government benefits are not meant to be the only form of income received by older Canadians but will be for many of us.

This evolving vision of retirement, greater longevity, investment risk and personal circumstances combine in a picture showing less urgency to retire. Fom 55 is possible but only for the dedicated few who are willing to sacrifice something today in order to secure an early departure from the workplace. The rest of us seem content to work longer in one form or another. Fom 67 anyone?