Another Look At Financial Planning For Retirement

A couple of months ago I nearly jumped out of my shoes after reading an article in one of Canada’s most respected newspapers, telling readers they could be saving too much money for retirement. Upon further reading, I found that the article suggested that 70% of your pre-retirement income would be fine but much less would be needed to get by, perhaps even half of that 70%. Wow! I leaped to my computer to propose this article to the Canadian MoneySaver, disputing the opinion in the newspaper article.  My pre-retirement taxable income was $50,000 and I’d love to see the two authors trying to get by on half of 70%–$17,500 a year at this time.

It was my belief that everyone was on the same page about the difficulties most Canadians are experiencing trying to save what they wanted or even what they need for their retirement. My retirement plan at age thirty was not to count on an organization’s pension or the government, and to start saving about ten percent of my income. That worked well and with the pension I did earn and the lakefront and farm properties we bought, I could retire at fifty years of age with part-time work. But that was a different era. An income of $17,500 now would have my income below the poverty line and probably living with one of my daughters. So much for B. S. (beguiling statements) about how in retirement your house is paid for, your kids are through university and your living costs are reduced.

The Real Retirement Picture

Let’s look at the credible, uncontestable facts of the situation and a bit of my possibly opinionated views after 35 years of semi- and full retirement. In a March 2013 Canadian MoneySaver article, Bob Barney, an insurance expert, summed up the retirement situation perfectly.  While I’ll contribute some new views I suggest you check out his article and use his free software to see what dollar figure you need for the lifestyle you choose for retirement.  When I tried it, it was right on with what I have found I needed during my several decades of retirement.

Demographics and Economy

The average life expectancy when I started my retirement plan was 67 years for men and 69 for women.  Today it is 87-89 for men and over 90 for women. Returns on investments were expected to average about 10% a year, inflation about 3%, and I established one million dollars as the goal for our retirement plan. The reality was a higher return on my investments, a higher inflation rate and my goal accomplished in twenty years, earlier than expected. This was more than needed for our desired upper middle class retirement and could be adequate today with OAS and CPP.

“Freedom 55” was a very attractive advertisement when I started and reasonably attainable then in 25 years but not today for a family with two children. The new slogan this year is “Money for Life. It is Never too Late to Start.”  It is obvious they didn’t use Bob’s calculator that I suggested, for it is B. S. (beguiling statements) as to need a $75,000 income to start saving at 45 or 50 years of age, retire at 65 and need that income for over 20 years. Most people would need to start saving an awful lot earlier when considering inflation and the economy.

The economy is an important new variable as the previous generation could easily average 10% earning a year while now 6.5% would be a reasonably safe guess.  Retirement money doubles in seven years at 10% and 11 years at 6.5%. The new card in the deck of the economy is the pressure on the U. S. and Canada [representing over 50% of the world’s stock markets] with extreme debt and deficit load. Experts suggest there are only three ways to deal with such an extreme burden: grow the economy and tax collected; inflate it (make a dollar worth only sixty cents); or declare bankruptcy. Thus a jump in inflation is greater than the usual possibility. The rate of inflation for the thirty years I estimated it could take me to reach my retirement goal was about 3.5% but for the present unpredictable future I don’t even have a guess. But as a place to start, at 3.5% a dollar would need two dollars to buy the same things 20 years later.

Pension Plans

About 24% of employees in the public sector in 2011 were covered in an employee pension plan. Many of these plans are now being converted from Defined Benefits that guarantee you a certain amount on retirement, say 60% of the average of your last five years of salary. They are being replaced with Defined Contribution plans that pay whatever amount they generate from the payments of you and your employer. While the former is usually preferred by employees, they are both subject to the financial viability of the employing company. In the slow and variable economy at present more companies are at risk of bankruptcy—think Blackberry and Nortel, General Motors and Ford. This risk is especially important for the Defined Benefits where the company based its benefits on earning 7-9% on its money and present or future markets pay less. There are likely a lot of underfunded pension plans out there in both the private and public sector where the pension plan money has been borrowed to pay unexpected deficits—think city of Detroit. And perhaps more problems to come if present workers continue on the job past 65 instead of being replaced with young people who draw a lower salary and fewer benefits.

Other Changes To Consider

Shifting Government benefits have also started to intervene with OAS starting two years later, the tinkering with the CPP, and the increases in income tax—think REITs, gross ups on Canadian dividends, and the 93% tax increase on dividends on incomes over $ 50K in four years. The pressure on the government to get more money has grown considerably since these increases were made.

The abolition of the rule requiring retirement at age 65 has opened the door for staying on the job much longer, especially to save needed funds for retirement and decrease the years for which the funds are required.  However, it also increases the likelihood of medical costs and institutional care that one of two partners will need to over 50%. Mary, my wife, required about $50K a year for her several years at a retirement home with usual activities, medical and nursing care.

Utilization Of This New Look Report

Application of these new dynamics are likely pretty self-evident by now but here is a brief summary for those who just want to ‘cut to the chase.’

The demographic and economy changes means twenty more years of retirement and a great deal more money needs to be saved to manage it comfortably. The impact of inflation could reduce a dollar’s value to less than fifty cents even before you start to use your pension and perhaps that much again during your retirement. The changes also suggest that the old guides for investment allocations of 60% fixed income and 40% stocks or 100% minus your age for stocks the rest for fixed income may no longer be appropriate. A sample of a very successful eighty-year old pension fund’s allocation at present is: 48% equities; 25% fixed income; 7% hedge funds; 5.5% real estate; 7.5% private equity; 4% Commodities.*

Other applications include: consider starting retirement savings at 30-35 with a small regular savings to benefit from compounding interest; checking the security and funding of any retirement plan at work and whether it is DB or DC; decide if you need your own additional plan; and, consider the pros and cons of RRSP, TFSA, and personal portfolio for use in your plan. At a more personal level my experience suggests thinking about a hobby or part-time activity that could produce income in retirement; paying regular attention to your personally owned assets, such as reviewing their achievements and especially their impact on your income tax. Change begets change and now it may require you changing your present lifestyle and aspirations in order to accommodate what you want for retirement. Even a minor adjustment such as preparing a back-up plan to deal with temporary unemployment, a recession with run-a-way inflation, or expensive medical care for you or your family will have you sleeping better and enjoying life now to a fuller extent.

* Pension Plan of the North American YMCA of which I am a recipient, that has for 80 years paid bonuses on top of its Defined Benefits.

Hedley Dimock, MA, Ed.D, semi retired author.

hdimock@teksavvy.com