The article “Here’s What You Need To Know If You Plan To Keep Working Into Retirement” was originally published on Financial Post on December 21, 2020.
There are different ways to keep working, and financial and lifestyle implications to consider
The concept of retirement is a relatively new one that is credited to German Chancellor Otto von Bismarck. In 1889, at a time when youth unemployment was high, he decided that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state” at age 70. He introduced an old-age pension program that paid German seniors to leave the workforce.
The life expectancy in Germany at the time was only 70 years of age, so German retirement tended to be short-lived. Today, the average Canadian retires at age 64.3 according to Statistics Canada, with public sector employees retiring at 62.6 on average, and for self-employed workers, 4.5 years later at age 67.1. There is a 50 per cent probability that a 65-year-old woman will live until age 91, and for men, age 89. Typical Canadian retirees should therefore plan for a retirement of more than 30 years, much longer than their late-19th-century German counterparts.
Regardless of why someone may want to continue working after retirement, there are different ways to do it, and financial and lifestyle implications to consider.
Transition to part time
I have worked with thousands of clients to plan their retirement and often share the same advice about how to ease into it. If you can do a phased retirement, transitioning to part time, it can be a great option to dip your toes into the retirement pool slowly.
Not every employer will allow an employee to work part time, but if you are able to retire and are prepared financially, what have you got to lose by asking? Inquiring is not grounds for termination for just cause, so if you were subsequently fired, however unlikely an outcome that might be, you would have statutory and common-law entitlements to compensation. If you were almost financially independent and able to retire anyway, you may come out ahead financially.
Some people may need to work into their 70s because they are not prepared financially for retirement, and these days, more than ever, there are roles for seniors to work well past the normal retirement age.
In the early stages of retirement, some semi-retired professionals will engage in consulting work. This, too, is an option to pitch to your current employer that is like working part-time but has other benefits.
A consultant has more flexibility than an employee, setting their own hours and rate, and can work for other companies as well. Retired employees must be careful about becoming self-employed but continuing to act like employees. If the relationship between an employer and former employee is too similar to employment, the Canada Revenue Agency may consider them to still be employed. This can cause the employee to have some self-employed tax deductions denied or the employer to be responsible for certain payroll taxes.
Most consultants operate as sole proprietors reporting their income and expenses on their personal tax return. If they do not use a business name that differs from their legal name, they will not need to register their name with the provincial government. Depending on the type of services provided, income level, and location, a business may have an obligation for federal Goods and Services Tax (GST), provincial Harmonized Sales Tax (HST) or Provincial Sales Tax (PST).
Some consultants opt to incorporate companies. There are up-front legal fees and ongoing legal and accounting fees for a corporation, and it may not be worth it, especially for modest amounts of income. If the income is going to be high enough or last long enough, a corporation may allow someone to shelter some of their income from tax given the low tax rate on earnings left inside a corporation. Income splitting is also a benefit of incorporation for someone aged 65 or older who may be able to pay dividends to a lower-income spouse who owns shares of the corporation, thereby minimizing family tax.
It may be easiest to work part-time for your current company or transition to consulting in the same industry but sometimes a new job is a better option. What did you enjoy doing when you were younger, maybe even as a child? There may be some clues here as to what new job you should consider in retirement.
I am surprised how few people in big cities like Vancouver, Toronto or Montreal consider early retirement by downsizing their valuable homes and moving to a lower-cost Canadian city or another country. Many couples or single people with no children or those who had children at a young age could semi-retire several years earlier and continue to work in a job and in a place that may bring them more satisfaction.
Places like Portugal, Panama, and Costa Rica — the top three rated countries in International Living’s 2020 Annual Global Retirement Index — may be within reach for early retirees for $2,500 to $4,000 per month including rent. By selling or renting out their home, an early retiree could move abroad temporarily or permanently and supplement their savings or rental income with part-time or remote work. The pandemic may accelerate this opportunity for many people whose roles may become permanent work-from-home positions.
Volunteering is a great way to continue to work in retirement. You can be paid in different ways to work, and sometimes volunteer work can be more lucrative in non-monetary ways than any job during your career.
Someone who wants to create a job or consulting opportunity for themselves could consider volunteering or working for a discounted wage with an individual or business who they would like to help. This might include a young person or company in their field who might not otherwise be able to pay their market rate. The point is there are reasons to work beyond money, especially when you are financially independent and do not need it.
Seniors with children or grandchildren may find great joy helping them with tasks, errands, or child care. There are things a retired parent can do to help their kids that money cannot buy.
Some of the happiest and healthiest retirees I have met are still quite busy in retirement, whether they are in their 50s or 80s. This is one of the most important lessons I have learned during my own career, and something I imagine as I envision my own retirement.
Believe me, there are days I long for the freedom to golf all day or lie on a beach sipping cocktails, neither of which are things I do enough of at this busy point in my personal and professional life. But the thought of growing bored of golf or the beach or other things that you work hard all your life to enjoy is something that leads me to believe I will continue to work after I retire, even if it is more for pleasure than for money.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.