Layoff for older workers means some tough budget decisions
Thousands coming to grips with lower income and an abrupt move into retirement
The layoffs have been rolling through Calgary and St. John's, anywhere dependent on the energy sector, and that's after years of downsizing throughout Ontario's manufacturing heartland.
So what of the workers aged 55 or 57, at the peak of their earning years, who get the dreaded pink slip or are told their contract will not be renewed?
Statistics Canada estimates 158,400 people aged 55 to 64 were handed permanent layoffs in 2015. Is there any hope of a comfortable retirement for those folks?
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Maybe, say financial advisers, if they can come to grips with the difficult task of living on a reduced budget.
"There has been a lot of this going on for the past year," says Tim Faunt, an independent fee-only financial planner in Calgary.
"In some cases, people are waiting for it to happen in hopes that they might get a retirement package, but for others, their position has just dried up and they were not in any way prepared for it."
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Those who suffer the most are the ones who still carry heavy debt loads, perhaps in the belief that the boom was going to last forever.
"In Calgary, I think the most difficult thing I find is that there's so much keeping up with the Joneses that people let their lifestyle expenses creep beyond what they really need," Faunt said.
Lose the excess, and simplify
It can be quite painful to give up the second vehicle, the dinners out, the recreational property and the 350 channels of cable TV, but Faunt says people who go through the process often find a way of living that is simpler and less stressful.
For those laid off at 55, there are five years before they can claim a government pension.
"It's a heck of a long time and that's what really catches people off guard," says Nichola Peterson, partner in the retirement solutions practice of Morneau Shepell in Toronto.
"You've got five years left to save up for retirement, but you need those personal savings even more."
Peterson said many people hope to return to work, but they have to be realistic about what kind of work they can expect.
"As opposed to thinking about how much am I making today and do I want to continue making that amount, it might be a case of how much do I need. In many cases, you don't need to work full time for that," she said.
Chances of working again
Statistics Canada released a study on re-employment among older workers in 2014, based on its Longitudinal Worker File, which follows workers over a 28-year period.
Among men who left full-time jobs at age 55 to 59, 62.9 per cent found other work, while among women 55 to 59, 57.2 per cent were re-employed. The proportion was lower for people 60 to 64, with 46.8 per cent of men and 41.3 per cent of women finding new jobs.
That transition to not having something that you do during the day ... especially if it's not your decision to leave, that can be a challenge- Tim Faunt, CalgaryFinancialPlanner.ca
Most older workers found work within a year of being laid off, but if they didn't, their likelihood of getting a job was greatly diminished, Statistics Canada found. In their new positions, though, they often earned much less than they had, and a high proportion were self-employed.
Some continued to have bad luck with their jobs, with 15.5 per cent of men over 55 and 11.2 per cent of women having more than four jobs in the ensuing years.
Skilled and professional people are sometimes able to consult in their former occupation and make high earnings, but the prospects for most older workers needing more income are diminished.
This is why financial advice is crucial in weeks following a layoff in order to come to terms with both short-term prospects and a retirement plan.
Veterans of the boom-bust cycle in the oilpatch tend to have some resources to draw on because they've gone through this before, says Jonathan Rivard, a financial adviser with Edward Jones in Richmond Hill, Ont.
He takes clients through a five-step process that can help them think clearly about the future:
- Where are you today?
- Where would you like to be?
- Can you get there?
- How can you get there?
- How can you stay on track?
"The sooner you can meet with someone to develop a strategy, the quicker you're going to lower your stress," Rivard said.
Here are some of the main considerations, according to our experts.
What to do with a severance?
Pay off high-interest credit card debt first, but bear in mind that any portion of the severance you take in cash will be taxed as income.
Will the employer pay out the severance over a period of years to provide bridge financing until you can draw a pension? If the job market is grim, you want to be taxed on your severance next year when your income might be lower.
One of the most effective uses of a severance is to place it directly into an RRSP. Even if you have to withdraw it to pay bills, you will likely pay less withholding tax as your income has declined, Faunt said.
What about the company pension?
Most Canadians are not covered by a company pension, including the many people working on contract who have seen their jobs disappear in the last year.
But older Canadians are most likely to be covered, and how to take that pension will depend on its terms, Peterson said. Some can begin drawing a pension right away, but depending on your household income, you might have the option of deferring pension payments.
"The good news today is that a lot of these people are coming out of defined-benefit plans. That allows the employer to look at this group and go, 'They're not in such bad shape after all,'" she said.
When to take CPP?
CPP is based on average employment earnings over your whole working life. For people who stop working at 55, that means five years of zero earnings averaged into their CPP contributions if they take the pension at 60. But if they wait until 65, there would be 10 years of low earnings.
Faunt's advice is to take the pension at 60 if you need the money. If you find work after 60, there's the chance of continuing to contribute to your pensionable earnings.
Peterson is more inclined to suggest waiting to age 65 and finding another way to bridge the earnings gap. But she says it's an individual decision that depends on your financial circumstances and requires consultation with an adviser.
What about benefits?
What happens to your disability, health and other insurance benefits? What coverage does your partner or spouse have that will cover you if you lose benefits?
You should be gathering information on your entire financial picture at this point so you can work that through with an adviser, says Rivard.
Budget, budget, budget
Most people don't know what they're spending now, let alone what they'll need in retirement.
"It's a step that most people have not taken. If I stand in front of a room [of 20 people] and say 'How many budget where your money is going today?'…I might see five hands, even in the financial industry," she said.
There are so many variables that come into play. Do you have debt? Is the mortgage paid off? Is your spouse working? Are there children to support? Where are you in terms of meeting your retirement savings goals?
And the most important is: How do you spend and what can you give up so you are living within your new, reduced budget?
"They may have been living within their means, but their means have changed a whole lot," says Faunt.
Think about retirement
Retirement is coming, so prepare yourself psychologically and financially.
With a financial adviser, work out your entire household income stream from CPP, OAS, GIS, company pension and personal savings.
Then find a way to live within that figure — even it means downsizing the house, Peterson said.
"People say, 'I want to leave the house to the kids.' Get over it. Why should the kids have a house worth on average over $600,000? That's a chunk of cash to leave to the kids if you're struggling to make ends meet."
Most people find they need less money than they expected, once their life is simplified, Faunt said.
"A lot of people find that retirement isn't as much about the numbers as they thought it was," he said.
"I think the most people … particularly the guys — we tend to define ourselves by what we do for a living. That transition to not having something that you do during the day … especially if it's not your decision to leave, that can be a challenge."