Getting Ready For Retirement
Brian Burton and Diane Gale have several things in common: both are in their 40s, both are married with two children and both spend a great deal of time pondering their retirements. But the similarities end there. Burton, a freelance writer in Calgary, and his wife, Barbara, a newspaper editor, are getting ready for their old age by contributing as much money as they can every year to their RRSPs. They own a spacious home in the city and have also invested in a serviced lot in Canmore, Alta., near Banff National Park, where they plan to live out their golden years surrounded by spectacular mountain scenery. Ask Burton about the route to a successful retirement and he confidently replies: “Save money, get your mortgage paid off and maximize your RRSPs.”
In contrast, Gale, a home-care worker, and her truck driver hus-
band, Ken Agnew, are deeply worried about the future. Most of their 1 combined $41,000-a-year income goes to caring for their children i and making the mortgage payments on their two-bedroom bunga| low in Toronto’s west end. So far, they haven’t put aside a cent for g their old age, and unless they win a lottery Gale cannot see how they & will ever be able to afford to retire. “I don’t know what is going to be1 come of me,” says Gale. “It’s a worry, but maybe I won’t live to be 65 è so it won’t matter.” =>
While Burton and his wife are taking the right steps to protect ~ themselves financially, Gale and Agnew are in many ways more typical of Canadian households. Gale has no idea what her small company pension will pay when she retires; her husband’s company does not even offer one. She readily acknowledges that saving as little as $30 a month would significantly improve their quality of life when they are elderly, and yet they have not managed to open a single RRSP. Their inability to plan for the future is the rule in Canada, not the exception. Only 42 per cent of the Canadian workforce is enrolled in company pension plans. The rest must somehow put aside hundreds of thousands of dollars if they are to have any hope of a comfortable retirement, yet in 1995 only 5.7 million Canadians—a third of those eligible—contributed to RRSPs. “I’m sure there are a lot of people who won’t have any money when they get old,” says Gale. “What worries me espe-
Neglecting to plan for the future is the rule in Canada, not the exception
cially is whether there is going to be any money coming in.” The outlook is perhaps not quite as bleak as she fears. With luck, the Canada Pension Plan and Ottawa’s proposed new Seniors Benefit will be around in the future to make life a bit easier for lowerincome Canadians—although seniors in higher tax brackets can expect little support (page 42). The question, then, is not whether today’s workers will be able to afford to retire at 65, but how well they will live when they do. Adding to the uncertainty is that the number of Canadians in company pension plans is shrinking, and virtually all the plans being created are so-called defined-contribution plans or
group RRSPs that leave the in-
vestment decisions—and the risk—in the hands of individual workers (page 46).
Still, a surprisingly large number of Canadians remain optimistic about their chances of retiring early. A poll of Canadian investors conducted for Maclean’s by Marketing Solutions, a Toronto-based financial services consulting firm, found that 49 per cent of respondents hoped to stop working before they are 60. As Marketing Solutions president Dan Richards puts it: “Clearly, Canadians are living in a state of mass delusion. There is no way on God’s green earth that the average person is going to be able to retire in comfort at
Maclean's MARKETING SOLUTIONS POLL
urvey responses are based on telephone inter views with principal or joint financial decision-makers in 1,000 Canadian households with at least $10,000 in say ings. The figures given are considered accurate to within plus or minus five percentage points, 19 times out of 20. Results may not add up to 100 because of rounding.
At what age do you hope to retire?
age 58, given what we know about the savings rate."
The biggest concern is for young people who will likely spend their careers moving from job to job, many of which will offer mea gre pensions or none whatsoever. If they do not begin saving now for retirement, they may find them selves forced to continue working well into their 70s. Analysts, how ever, say few people of any age are prepared financially for their declining years: fully a quarter of the population will not even have $100,000 in savings by the time they turn 65. `The majority of Cana
uA~~yLLt1LLVJ~J. A1L~1iJJ~!(~ dians are not really doing a de tailed analysis of what they need in retirement," says Bruce Arm strong, director of retirement services for the Bank of Nova Scotia in Toronto. "So when they finally have to live off the income from their savings, they have to adjust their expectations-usually downward." The retirement planning scramble is bringing thousands of worried people into the offices of financial planners across the country. One question comes up again and again: how do I put aside enough now to protect my future while still paying for a mortgage and my children's education? Kevin Moriarty, a princi pal at Toronto-based William M. Mercer Ltd., Canada's largest
BUILDING A GOLDEN NEST EGG
H ow much do you need to put aside for retirement? The answer depends partly on when you start. The following figures show how much someone would have to save every year to generate an annual retirement income (excluding government and company pension benefits) equal to $50,000 in today's dollars, assuming the individual stops work at age 65 and lives to 90. The calculations are based on three-per-cent annual inflation and an eight-per-cent return on investments. Experts say that, in general, a person needs 70 per cent of his or her pre-retirement income to maintain a similar standard of living after retirement.
SAVINGS REQUIRED ANNUAL ATAGE65 SAVINGS Starting at age 20 $2,018,387 $5,222 35 $1,295,523 $17,154 50 $831,544 $45,938
M. Mercer LtcL, Lanacla's largest pension consulting firm, offers a blunt answer: regardless of their age, people who have yet to be gin saving should start nowand should learn to closely mon itor the performance of their investments. The cold reality, says Moriarty, is that by the time they leave the workforce, people need to have atleast $100,000 stashed away for every $10,000 a year they hope to generate in retirement income from annuities; in other words, a $50,000 income would require $500,000 in savings. To reach that level, a 35-year-old investor would have to save $5,000 a year in constant dollars inside an RRSP for 30 years and earn an an nual return on investments of eight per cent Tithe same person waited until age 45 to begin saving, he or she would need to put away $14,000 a year for 20 years. The figure jumps to a staggering $35,000 a year if the saving begins at age 55 and there are only 10 years left until retirement. “If you do not start early enough, the goal will become unreachable,” says Jury Kopach, vice-president of retirement services atT. E. Financial Consultants Ltd. in Toronto.
Retirement planning is at best an inexact science
In some ways, the generation that retired over the past 20 years was more fortunate. Many qualified for government and private pensions that provide nearly 75 per cent of the incomes they received while they were working. And for millions of mortgage-free seniors, the explosion in real-estate values since the 1960s has been a financial windfall. Future generations, however, may not be able to count on property prices keeping up with—let alone outpacing—inflation. At the same time, the dramatic decline in interest rates this decade has reduced the amount of income that was once generated by fixed-income assets such as bank deposits, GICs and bonds.
The effect of those changes can already be seen in the lives of people like Barbara Kirkpatrick, 69, of Vancouver. Partly because of lower interest rates, her modest government and private pensions and meager income from savings pay only $1,200 a month, and she is forced to take $400 a month out of her savings to put towards her rent. The stress has taken a toll. “I wake up at night in a panic about money,” says Kirkpatrick. “I think about it all the time.”
The baby boomers’ children will have to be especially careful in planning their retirements. Many will not have a private pension plan to fall back on, and, according to the Maclean’s/Marketing Solutions poll, the majority do not believe the CPP will be there to support them. As a result, there is a growing awareness among young people that they must take steps now to generate future income. “They are the most vulnerable,” says Moriarty. “They could blow their retirements by loading up on consumer debt and procrastinating about saving.”
The implication for most people is clear: they must cut back on spending now and invest that money for the future. Armstrong, for one, advises clients to have money deducted directly off their paycheques and funnelled into a tax-sheltered vehicle such as an RRSPeligible mutual fund. Once they take that step, he compares his clients’ savings and investments to the lifestyles they hope to enjoy
in retirement. If there is a gap, he helps them devise a strategy to bridge the shortfall—which may mean saving more, working for more years, seeking a higher return on their investments or lowering their expectations for retirement. Above all else, Armstrong says, starting a savings program is the key to living well as a senior citizen. “The monthly pay deduction is very powerful over 15 years,” he says. “It is simple, but it works.”
Regina dentist Ray Myers, 41, started planning for his retirement almost from the day he graduated from dental school at the University of Saskatchewan in 1984. His goal: stopping work at age 55 with his house paid off and almost $1.5 million in savings. He and his wife, Davie, 41, his office manager, deposit $21,000 a year into their RRSPs, which are invested in a mix of stocks and bonds. For good measure, another $1,000 a month goes into a mutual fund held outside of his RRSP. Myers constantly monitors his portfolio to make sure he is on track to reach his target “We should have the same lifestyle in retirement as we have now,” says Myers, “or a better one.”
Dawn Desjardins, 33, is equally intent on enjoying her retirement. A fixed-income analyst for a major Toronto brokerage, she bases her entire investment strategy on her belief that the CPP will not be there to bail her generation out when they reach old age.
She comes from a family of savers and contributes the maximum amount to her RRSP annually even if she has to borrow from the bank to do so. Desjardins and her husband, Stephen, who have a 10-month-old daughter, also forgo expensive vacations and rarely eat out. By sacrificing now, they say they are buying peace of mind in retirement. Adds Desjardins: “I’d rather do without other stuff just to have peace of mind about the future.”
For Desjardins and millions of other investors, today’s booming stock market has been a godsend—generating an average 17-percent annual return so far in the 1990s. Historically, however, the market has averaged no more than about 10 per cent a year, which suggests that sooner or later the current bull market will be offset by some lean—if not downright nasty—years for stocks. ‘Traditionally, equities have outperformed every other asset class,” says Kopach. “But people have to give themselves enough time to weather drops in the market.”
Approximate value of Canadian household savings and investments, excluding real estate
How closely have you calculated the amount you will need to live on when you retire?
Somewhat closely 40 Not very closely 18~j Not closely at all 17 Have not tried Already retired
An even bigger conundrum confronts people in their 40s and 50s who are only now beginning to save. To have any hope of retiring in style, they will have to strive for high returns on their investments—which means taking more risks than those who started investing earlier. The problem is especially acute for those who hope to retire before they turn 65. Most company pension plans reduce the amount paid out to recipients by about six per cent annually for each year of early retirement. A person leaving work five years ahead of schedule would forfeit up to 30 per cent of his or her pension, and that shortfall would have to be made up by pumping money into high-risk, high-yield investments such as mutual funds that specialize in small stocks and emerging markets. “If a person is 45 and they want to retire at 55, guaranteed instruments won’t do it,” says Kopach. “They have to go to equities. If they don’t, they may have to retire at age 70.”
Canadian household excluding real estate
That applies to a lot of Canadians. Even among households in which the main income earner is between 55 and 64, fully 48 per cent have less than $50,000 in investments (excluding the equity in their homes), according to Marketing Solutions. Only 17 per cent are sitting on a nest egg worth more than $250,000, while 35 per cent have accumulated between $50,000 and $250,000. “When you compare those figures with what people need to have, there are some pretty huge gaps,” Richards says. His own rule of thumb is that a couple earning a combined $80,000 a year would require a post-retirement income
of about $60,000 in today’s dollars to maintain their present lifestyle. To generate that level of income, they would need to put away about $600,000 by the time they leave the workforce.
That, of course, is only a very rough estimate. All sorts of factors make retirement planning at best an inexact science. For one thing, people are living longer now than ever before: many financial planners based their calculations on the assumption that people currently in their 20s will live to be 90. At the same time, health-care costs are rising faster than inflation—and further cutbacks to public services could add substantially to the financial burdens of tomorrow’s elderly. Realistically, says Moriarty, “you may have to expect to keep working for a longer period of time. That solves a lot of financial problems.” Perhaps, but working longer is not the retirement of most Canadians’ dreams.