If you’re a fan of The Big Bang Theory, you would have undoubtedly heard about Schrödinger’s Cat from Sheldon Copper. Schrödinger’s Cat experiment was done in 1935 to show that the theory of quantum mechanics which postulates that the only way to know where a particle is to observe it, can lead to illogical conclusions. To make his point Schrödinger’s put a cat in a box and rigged it so that there was a 50% chance that the cat would either be dead or alive after one hour. Theoretically speaking, based on the logic of quantum mechanics before you open the box and observed the cat, it was both dead and alive! You can only determine the state of the cat after you open the box and observe the cat.
I started thinking of how similar Schrödinger’ cat experiment was to playing the lottery. Prior to the result you are both a winner and a loser, it is only when you observe the actual numbers do you know the result. The probability of winning Lotto 649 for instance, is 1 in 13,983,816. You simply have to take your chances. In this case Schrödinger’s Cat has a better chance of being alive than you have of winning the lotto. This fact, however, doesn’t seem to bother Canadians. Last year a polled done by the Bank of Montreal (BMO), they found that 34% of people polled said that winning the lottery was their retirement plan.
Planning for retirement results in a higher probability of success that not planning for it. Then it depends on how this plan is structured. The graph above highlights seven sources of income that Canadians plan to rely on when they retire: their children, winning the lottery, inheritance, selling their home, part-time job, RRSP/TFSA and CPP.
Let’s take a quick look at some of the pros and cons of each. First, relying on your children to fund your retirement is very risky. The two main factors which will determine the ability of the child to eventually take care of their parents would be their earning capacity and the selection of a life partner. There are no guarantees that earning capacity will be sufficient to support elderly parents, especially if your children has children of their own who are under eighteen years of age. Also the selection of life partner will be a significant factor in whether or not elder parents will be financially supported during retirement. This may sound harsh, but unfortunately it can be a reality for some.
The second, relying on winning the lottery to fund your retirement is simply reckless. You have no control over the selection of the winning numbers. There is nothing you can do (other than buy all the tickets) to ensure that you do win. This strategy should be avoided at all cost. Inheritance is a good bet for your retirement assuming that all the conditions are met. These conditions include, the existence of a will and clearly stated guidelines as to whom and how much will be passed on. Additionally, you have to ensure that taxes and probate costs are taken care of so that your inheritance is actually an inheritance and not a burden financially or legally. Here is where your lawyer and financial planner needs to work closely together.
Real estate is an essential in any portfolio and should be part of your retirement strategy. However, selling your principal residence as a source of retirement is not always recommended. Simply because there is no guarantee that your house will sell for what you are asking for. Housing market and economic conditions when you retire are impossible to predict. Also, chances are your neighbourhood would have changed over the years. This will affect property prices and they can go either way.
Having a part time job during retirement is an excellent strategy to keep active and be engaged. It, however, is not a strategy to rely on to fund your retirement. RRSP and TFSA are great avenues for retirement income. You must understand and be prepared for the possibility that that if the financial system crashes the day before you retire, then you will have no retirement saving if RRSP and TFSA were your sole sources of retirement income. Finally, pensions alone are not enough to survive on. The average amount for a new beneficiary in 2015 is $640 per month with a maximum of $1065 per month.
When planning for your retirement having RRSP/TFSA, real estate (other than your principal residence), and your pension should form the core of your retirement plan. How these are structured will depend on your personal circumstances. Things like the lottery, part-time jobs, selling your principal residence and the children as a source of support should the icing on the cake. They should be an extra sources of income, but never your main source of income during retirement. In every venture or endeavour we are like Schrödinger’s cat, there is a 50% chance of us succeeding or failing. The difference between us and the cat is we have some control of the one outcome over another. Even then we may not be 100% sure to get the outcome we want we can increase the chances of it, with proper preparation and planning.