Financial literacy helps decrease vulnerabilities, improves resilience: FCAC

April 6, 2023

There’s been much written of late about the lack of financial literacy in Canada, and the need to make people better equipped to deal with complex financial situations. Save with SPP reached out by email to Léonie Laflamme-Savoie, Media Relations Strategist at the Financial Consumer Agency of Canada (FCAC) for more information on this important topic.

We asked her first for a bit of background on the FCAC.

“The FCAC’s role is to strengthen the financial literacy of Canadians and supervise the compliance of federally regulated financial entities, including banks, with their legislative obligations, codes of conduct and public commitments,” she writes. “As part of its commitment to strengthening the financial literacy of Canadians, FCAC provides unbiased and fact-based information to help consumers make informed financial decisions on topics such as banking services for seniors and saving for retirement,” she continues.

We also asked FCAC about the programs it has established to promote financial literacy.

“In 2021, the Agency published the National Financial Literacy Strategy which aims to achieve better financial outcomes for Canadians by fostering changes in the ecosystem – either by removing barriers or by catalyzing action – that will help Canadians strengthen their financial literacy and ultimately their financial resilience,” states Laflamme-Savoie.

“FCAC’s research indicates that financial vulnerability affects a wide range of people, regardless of culture, community or background. While vulnerability is not limited to specific demographic segments, systemic barriers contribute to the fact that certain groups, such as seniors, are more likely to face financial vulnerability,” she adds.

She expanded a bit on challenges facing “current and future” seniors, particularly with retirement in mind.

“Increasing financial literacy decreases the risk of vulnerability and increases the likelihood of financial resilience. Financial literacy is key to help seniors make money decisions and manage their day-to-day personal finances. With increased financial literacy, current and future seniors are more likely to: 

  • look at retirement in a holistic manner (to consider their future sources of income/including government benefits/credits, the need for budgeting and building short/long-term savings/investments, accumulating/managing other financial assets, ensuring adequate insurance coverage, being informed about tax implications, about power of attorney, etc.). 
  • make more informed decisions and better prepare for retirement by building personal savings and assets; considering desired lifestyle, longevity/life expectancy and increasing cost of living (food, rent/housing, utilities, medication/health care, etc.) and other unique costs that can arise later in life (i.e., retirement living accommodations, living with a chronic illness/disability, losing or caring for a sick spouse, etc.) 
  • make sound decisions about when and how to retire  
  • choose financial products that make the most sense for their needs  
  • plan for and cope with major financial decisions related to life transitions (for example, losing a partner and taking on financial management responsibility) 
  • navigate and better understand how public programs and services can help them  
  • recognize and protect themselves against financial abuse, fraud and scams  
  • determine the appropriate advice and supports to help with financial decisions and with managing their finances.”

Laflamme-Savoie provided a little more detail on how financial literacy programs can help seniors.

“By providing opportunities for seniors to learn at “teachable moments” and in contexts relevant for their own situations, financial literacy programs can support them in planning for and navigating through important life events in retirement,” she writes, adding that “financial education can help seniors to: 

  • protect themselves from fraud and scams and/or from financial exploitation by family members, friends and/or support workers.   
  • adapt to changes in the banking industry, like the increased digitalization of banking products/services. With the proper support, seniors can build their knowledge and learn how to use these new products or technological innovations, thus building their digital financial literacy. 
  • understand how economic issues (i.e., economic growth or downturn/recession, rising inflation, falling interest rates, etc.) can have an impact on their financial situation, and help them prepare for and adapt their financial affairs accordingly, from both a short- and long-term perspective.”

“The National Financial Literacy Strategy recognizes these important issues and calls on all stakeholders to take them into account when designing products and services, including adopting approaches and tailoring programs to seniors’ needs,” Laflamme-Savoie continues. “FCAC offers Your Financial Toolkit, a comprehensive learning program that provides basic information and tools to help adults manage their personal finances and gain the confidence they need to make better financial decisions. Topics include, but are not limited to, Retirement and Pension.”

Finally, she writes, “as part of its mandate, FCAC oversees the compliance of regulated entities with federal regulations such as the Code of Conduct for the Delivery of Banking Services to Seniors which guides banks in their delivery of products and services that meet the needs of seniors.”

We thank Leonie Laflamme-Savoie and FCAC for taking the time to answer our questions.

She is correct — being a senior is complicated financially. You’re dealing with estate issues from your late parents, you have new and complex tax issues due to having more than one source of income. A great defence is to boost your level of financial literacy.

If you don’t have access to a workplace pension plan, and are feeling a bit overwhelmed by the prospect of setting up your own savings plan for retirement, the Saskatchewan Pension Plan may be just the resource you are looking for. It’s open to any Canadian with registered retirement savings plan room. Check out SPP today, a made-in-Saskatchewan retirement income solution!  

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

A look Down Under, where the workplace retirement system is an all-DC “super”

March 2, 2023

While here in Canada it’s up to employers to decide whether or not to offer a retirement program, Australian employees are covered by an all-defined contribution (DC), all employer-funded system of superannuation funds, or “supers.”

This Australian superannuation system now has more than $3 trillion (Australian) in retirement assets under management,

Save with SPP reached out to the Association of Superannuation Funds of Australia (ASFA) by email, and ASFA’s CEO, Dr. Martin Fahy, was kind enough to provide answers to our questions on how retirement savings are handled down under.

Q. Does the Australian superannuation system involve mandatory pension plans for all workers, with contributions made exclusively by the employer? And without any contributions from either the government or (required) contributions from individuals? (we are imagining that employees might be allowed to top up the contribution to their supers).

A. Yes, the Australian superannuation system requires employers to make mandatory contributions (known as Superannuation Guarantee contributions) to their employee’s superannuation. Currently, 10.5 per cent of wages are paid by the employer to superannuation. Individuals can make additional contributions (both before and after tax) within limits/caps prescribed by government.

Not all workers are covered by the system. For example, self-employed individuals and some contractors (dependant on the nature of the work arrangement) do not receive Superannuation Guarantee contributions.

Q. Thinking of things like the pooling of investments and the lower management fees large funds can charge, what are the chief advantages of the DC model? Can people move from job to job without transferring their supers or are transfers simple to make?

A. Individuals can choose to keep their super in the same fund when they move roles – it is not tied to their employer.

Access to professional investment management at wholesale rates, and the ability to participate in investment opportunities that would otherwise be unavailable to individuals, is one of the chief advantages that a scaleable DC model provides. Australia’s DC system is characterized by strong governance, regulation and prudential oversight. Retirement outcomes are dependent on the level of contributions (which are mandatory and the rate of which is increasing) and investment performance over time (with funds required to meet annual performance benchmarks to continue operating). Workers are not exposed to more extreme problems that have arisen in some defined benefit (DB) systems, such as reductions (or in the worst cases eradication) of workers’ entitlements due to failures in assets/liability matching or fiscal tightening.

Recent changes to the Australian system “staple” a worker to their superannuation fund, so that they maintain a single fund unless they choose otherwise (either to switch to a new fund or maintain multiple funds). This alongside other reforms and higher levels of consumer awareness has reduced account proliferation and the incidence of unintended multiple accounts being held by individuals. This will lead to reductions in fees paid by individuals and improve long-term retirement outcomes.

Q. This system appears to have succeeded on many fronts, but the percentages of Australians with pension coverage must be close to 100 per cent. If this is true (probably the best coverage in the world), what are the other great things about the Australian super model?

The Australian retirement income system is a “three pillar” system:

  • Pillar 1 Government funded Age Pension
  • Pillar 2 Compulsory superannuation
  • Pillar 3 Voluntary savings (both inside and outside of superannuation)

As the superannuation system matures (that is, as more individuals have had the benefit of superannuation at higher contribution rates for their entire working life) the role of compulsory superannuation in providing retirement income is becoming primary. Most retired Australians today still receive some form of means tested government-funded Age Pension (a safety net payment set around the poverty line), however this is increasingly a part-pension due to higher levels of superannuation savings. One of the most remarkable (current and projected) achievements of the Australian superannuation system is its role in maintaining Age Pension payments around 2.5% of GDP over coming decades, well below what is being spent by international counterparts.

Q. Here in Canada, funds in a registered DC plan must, by the time the plan member is 71, either be converted to a life annuity or transferred to what is called a registered retirement income fund, a fund that mandates annual withdrawals (minimums). Taxes are deferred until the withdrawal stage. How does Australia handle decumulations? Are there rules similar to that?

A. There is no compulsion to convert to an annuity or allocated pension. However, there are incentives in place within the system to encourage this (for example, a zero-tax rate on investment earnings in pension phase, vs a 15 per cent rate in accumulation phase). The previous government legislated a Retirement Income Covenant that requires superannuation fund trustees to consider their retirement phase offerings and make them appropriate for their members. Last year funds submitted their initial strategies to the prudential regulator on this front and are now in the process of updating products and services in line with this.

Once in pension phase there are minimum withdrawal requirements. This is one mechanism to ensure that accrued savings are utilised for their intended purpose – retirement income that enables individuals to live a comfortable retirement.

Our thanks to Dr. Fahy and ASFA for their time and help. Here’s a link for more information on Australia’s superannuation system.

If you don’t have an employer-sponsored retirement program, or want to augment what you have, the Saskatchewan Pension Plan may be a program worth investigating. As an open DC plan that is not sponsored by your employer, SPP shares some similarities with the Australian system — it’s a large, pooled fund, which keeps investment management costs down, and as in Australia, portability is built in when you change jobs — you won’t have to transfer your benefits from one employer-sponsored plan to another. Check out SPP today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Are high interest rates making annuities more attractive?

February 2, 2023

One of the few things that cost less when interest rates go up are annuities, long a key piece of the puzzle when turning retirement savings into income. 

Save with SPP reached out to the Canadian Life and Health Insurance Association (CLHIA) to find out if this recent higher-interest environment is making Canadians think harder about annuities. 

According to the CLHIA, Canadians purchased over $1 billion in individual pay-out annuities in 2021. This includes both life and term-certain annuities from registered and non-registered funds.

You can buy an annuity from a provider, usually an insurance company. In exchange for a lump sum, the provider will pay you a monthly income for life or for a selected period of time. We contacted Noeline Simon, Vice President of Taxation, Pensions and Reporting for CLHIA, to ask a few other questions about annuities. 

Q. With higher interest rates of late are CLHIA’s members seeing more interest in annuities? 

A. All else being equal, higher interest rates should result in higher annuity benefit payouts. This should have a favourable impact on demand for the product, however, there may be some time before we see the full evidence of this in the market.

Q. Do you see one benefit of annuities being insurance against volatility? (If markets go down, your annuity payments stay the same.) 

A. Yes. A significant benefit of guaranteed life annuities comes from the down-side protection against adverse market conditions and the annuitant out-living their anticipated savings. 

Q. Did the last 20 years or so of low interest rates sort of deaden interest in the idea of annuities versus registered retirement income fund (RRIF) conversions? 

A. The prolonged low interest rate environment did contribute to dampening annuity sales, even with increasing interest rates it will take time to change retirees’ demand for annuities.

Q. What do you see as the pros and the cons of annuities? 

A. Canadians who are retiring or nearing retirement should consider guaranteed life annuities as a part of their plan, since they provide downside protection against adverse market conditions and reduce the risk of outliving one’s savings. Life and health insurers believe that retirees really can benefit from having a range of choices in terms of products and solutions that can help them optimize their income in retirement. To this end, the CLHIA and others have advocated for a variety of decumulation tools, such as Advanced Life Deferred Life Annuities (ALDAs) and Variable Payment Life Annuities (VPLAs) and will continue to so into the future. 

We thank Noeline Simon for taking the time to answer our questions! 

Did you know that the Saskatchewan Pension Plan is also an annuity provider, and offers a variety of annuity options for its retiring members? According to SPP’s Pension Guide, SPP offers a life only annuity (no survivor or death benefits, but highest payment to you), a refund life annuity (provides a benefit to survivors on your death), joint and last survivor annuity (provides a lifetime pension on your death to a surviving spouse or common-law partner). The joint and last option allows you to choose, for your survivor, a pension equal to 60, 75 or 100 per cent of what you were getting. Contact SPP for more information about the annuity option at retirement. 

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Research sheds light on spending in retirement — suggests we spend less as we age

January 12, 2023

It’s an age-old question — and also, an old age question: do people spend less money as they age?

For answers, Save with SPP reached out by email to Dr. Susann Rohwedder of the RAND Corporation in California. She recently discussed the findings of a 2022 research paper, entitled Explanations for the Decline in Spending at Older Ages (Rohwedder, Hurd, Hudomiet 2022).

In her presentation on the research, Dr. Rohwedder says it is important for people to be aware of what their spending patterns in retirement could be, in order to plan on how much to save. Her research suggests that real household spending (adjusted for inflation) declines as people age and their health declines. 

We asked her a few questions on the general finding that people spend less as they age.

Should people be more or less concerned about running out of money?
Our findings are about the shape of the spending trajectory which helps individuals and households better anticipate their spending needs over their retirement years. We consistently find declining (real) spending trajectories across various groups, and it appears that for most households the declines are due to reductions in enjoyment related to various types of spending as health declines and other ageing related changes occur (e.g. widowing, loss of friends/social contacts). Households who thought that real spending would increase with age could use this information to update their expectations, possibly easing some worries of running out of wealth.

Often income replacement rates are mentioned as a retirement savings target — what do you think of this kind of planning target?
Regarding replacement rates, I do not find them a useful concept for financial planning for retirement in a world of where much of retirement wealth is not annuitized, and where the concept of retirement is not that well defined (such as retirement in dual earning households; and what about those who return to work/unretire?). In their financial planning for retirement, households should start with considering their spending needs over the course of their retirement years. Because of the shorter time horizon, working out desired living standards for the early retirement years tends to be easier than anticipating spending needs some 20-30 years into the future. Once having decided on the level of spending at the beginning of retirement, households can use the shape of the spending trajectories, that is, the rates of spending change that we have estimated, as a broad guide for how their spending will evolve in their later retirement years. Contrary to the common assumption that real spending in retirement will be constant or even increase, we found that spending tends to decline for most households, and this does not appear to be the result of tightening budget constraints with age. This is also what we found in another recent report on Spending Trajectories After Age 65.

Do people oversave?

Some do, some don’t … there is substantial variation across households. An important consideration in this regard is the economic position of households throughout their working years. Among households that reach retirement with few economic resources, some were not always poor and could have saved more. Those who have always had to live on very limited means, saving more earlier in life would have meant cutting necessities (food, rent, etc.). This demonstrates that the assessment of over- or under-saving should be viewed in the context of households’ lifetime resources.

Our finding about the shape of spending trajectories at older ages is a critical input to improving financial planning for retirement and also to assessments of whether people over- or undersaved. For individuals and their households is not easy to anticipate spending needs some 20-30 years into the future. Traditional wisdom suggests flat or even increasing spending at older ages. However, our estimates suggest that spending after age 65 declines consistently by about 1.7 – 2.4 per cent in real terms. This finding applies broadly, even among those in the highest initial wealth quartile, and our earlier paper provided plausible explanations for declines in spending at older ages: declining health and other factors that reduce enjoyment of some types of spending. While financial constraints play a role for some, we did not find evidence of tightening financial constraints at advanced ages.

Are there any other findings in this context you found surprising?

In the second (and quite related) report we showed that there was only modest variation in the estimated declines in spending by initial wealth quartile (measured when the individual was between 65-69 years old). So, even among those in the highest initial wealth quartile we found very similar rates of decline in spending as for less well-to-do households. This reinforces our earlier findings that the declines in spending are for the most part not driven by tightening budget constraints with age.

We thank Dr. Susann Rohwedder for answering our questions.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Paying down your debt is saving for retirement, says Jay Zigmont of Childfree Wealth

December 22, 2022

Paying down debt, along with building money management skills, are key steps in the process of getting ready for retirement, says Jay Zigmont, PhD, CFP®, who is the founder of Mississippi-based Childfree Wealth.

Save with SPP was able to connect with him by e-mail recently for his views on these topics.

Do people understand the need to pay down credit cards, lines of credit, loans and other non-house debt before they retire? (Thinking here about the difficulty of retiring WITH debt)

While I recommend being debt free when you retire, it is often one of the more controversial topics.  You should make getting out of debt a priority.  Paying off your consumer debt will most likely give a better tax-free return than investing.  Once your consumer debt (credit cards, loans) are paid off, your goal should be to pay off your house before retiring.  With all of your debts paid off, your retirement expenses can be controlled and should be a lot less.  When you enter retirement, you are on a fixed income, so keeping your expenses low may be the key to success. 

What’s the most important financial planning step that folks can take to turn around their (lack) of money management skills?

Learn how to manage your money.  The only thing I was taught growing up was how to balance a chequebook, which is a complete waste of time now.  You can choose at any time in your life to learn how to manage your money.  You can learn on your own, or by working with a financial planner.  Either way, your goal should be to understand your own money behaviours and how to get the most out of your money. 

Is it ever too late to start saving for retirement – what are your views on the importance of setting aside money for the future?

Saving for retirement is more than just putting money into accounts and investing it.  Paying down your debt is saving for retirement.  Learning how to live on a budget is a skill for retirement.  Your age is not what determines your ability to retire, your net worth and money behaviours are what matters.  No matter where you are in life, you can always learn more and save more. 

What’s the one thing that surprised you the most about people and money?

What surprises me most about money is how people compare to others and try to apply rules of thumb that do not fit them into their life.  For example, I work with Childfree and Permanently Childless people.  Most (if not all) general financial advice assumes that you either have kids or will have kids.  For Childfree people, who don’t have kids and aren’t planning on having kids, these guides just don’t fit well.  The key is not to compare yourself to others or benchmarks, but to compare your progress toward your goals year over year.  Your life and your money are your own, stop comparing against others. 

Childfree Wealth, notes Zigmont, is a Life and Financial Planning Firm based in Mississippi. He is a Fee-Only, Advice-Only, Fiduciary, Certified Financial Planner™, Childfree Wealth Specialist, and author of the book Portraits of Childfree Wealth.  His PhD is in Adult Learning from the University of Connecticut, and he specializes in helping Childfree and Permanently Childless people to learn how to manage their money.  

We thank Jay Zigmont for taking the time to answer our questions.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Mental and emotional retirement readiness as important as financial: Anna Harvey

November 17, 2022

Asked how important being mentally and emotionally ready to retire is versus being financially ready, Certified Retirement Coach Anna Harvey says both things have equal importance.

In a telephone interview with Save with SPP, Harvey, a retirement transition specialist with Boost Potential in Victoria, BC says “the financial piece is important because, without it, money worries stress us.  However psychological and emotional readiness is just as important, Harvey says. “We want a retirement of vibrant wellbeing. We want to create a great next life chapter.  Both require self-awareness.”

Harvey says that the financial emphasis in retirement preparedness is understandable. Employers, she explains, often offer employees retirement benefits therefore most also offer benefits-related pre-retirement webinars.  Financial professionals and institutions actively promote financial awareness both pre- and post-retirement.

The result for retirees can be financial “overfocus” which, she explains, can be to the detriment of looking at mental and emotional retirement readiness. “We ignore this at our own peril.”

She gives the example of a gentleman who found himself lost and adrift after retiring.  “In an attempt to fill the void he experienced upon retiring he, in his own words, ‘burned through money’ buying three new cars in a year.  He was underprepared emotionally and mentally to replace the satisfaction he got from his career.”

Many of us will miss our work, she says. Our career has spanned decades and our work environments have provided not only tangible financial benefits but also equally satisfying non-tangible benefits, she explains.  “A built-in social network is one of those,” Harvey says.  “We engage almost constantly at work – water cooler chats, team meetings, company functions. Colleagues become friends.  In retirement, that network substantially disappears.”

As well, Harvey has noticed that those in the professions and C-suite executives can be particularly challenged upon retirement.  “There’s a status piece that is typically associated with being a doctor, lawyer or CEO.  Without some pre-retirement emotional and mental preparedness, they can really struggle with the ‘who am I now?’ question.”

That’s where Harvey says retirement coaching can help pave the way for a smoother transition.

According to her website, “retirement can be made more fulfilling, satisfying and purpose-driven if your decisions and actions are aligned with your passions, strengths and values.”

Harvey offers individual and group coaching, with the goal of answering that question of “who am I now” as well as the related question of “what’s next,” the site notes.

Harvey walks us through a typical exercise.

“I created an exercise called `shelf or suitcase,’” she explains. Thinking back on all the things career and workplace provided, we can make conscious decisions about those attributes we want to “pack” in a suitcase to take into retirement, or to leave behind “on the shelf.”

“It’s a powerful experience for people to stop and consider: What part of the job have I enjoyed?  What parts were the stressors?” Things like deadlines and meetings are typically shelved, she says, and what’s packed are positives – often including autonomy, creativity and being part of an innovative team. At the end of the exercise, those positives can become part of a fulfilling retirement.

“It’s my dream that companies start to recognize the importance of the psychological and social aspects of the retirement transition,” says Harvey.  “By pairing financial awareness in equal measure with self-awareness, they can provide employees a full set of tools to create a fulfilling retirement.”

She has a different take on the often-expressed idea that retirees need “goals” to keep their post-work lives in focus. “Not everyone is motivated by goals,” she explains. “Some cherish freedom from goals – especially in the early stage of retirement.  But they can feel guilty relaxing after years of achieving, accomplishing and deadlines.  They feel they need permission to slow down. Many times I’ve said to a retiree, ‘it’s OK to relax. You’ve earned it.’”

She says that this early part of retirement includes a “honeymoon stage” where people enjoy working through their “bucket list” which can include exciting travel, renewed hobbies, and home renovations. Then, after about 18 to 24 months, folks enter the “now what” phase, where they realize the span of life still ahead.

That’s when they need to think deeply about what brings them life satisfaction.  “Life satisfaction is unique to each of us.  It’s based on who we most authentically are, our core values, our strengths, and how we want to continue to be of service.  Finding new purpose is often a key part of this phase.”

Too many retirees do “retirement by default”, Harvey says, by picking up a generic concept of retirement.  “I refer to the three Gs – golf, gardening, and grandkids. Yes, this may truly define life satisfaction for some, but by remaining curious about all that is out there, we continue to learn and grow – factors that are known to provide life satisfaction.” she says.

She points out two things today’s retirees have clearly in view:  longevity – we are living longer lives than ever before; and ageism – she predicts that as boomers retire, they’ll take a proactive stand against older adult stereotypes.

She concludes by sharing her insight that “there is increasing awareness of the value in understanding and addressing the psychological and social aspects of retirement.  When self-awareness is fully paired up with financial awareness as preparation for retirement, retirees will launch some very fulfilling and interesting next life chapters.”

We thank Anna Harvey for taking the time to speak with us.

While the emotional and psychological aspects of retirement are important, so too is the financial side. Be sure you are factoring in both! If you don’t have a retirement program at work, consider the Saskatchewan Pension Plan, which has been helping people build retirement security since 1986. Open to anyone with registered retirement savings plan room, SPP can help grow your savings into future retirement income. Check them out today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Understanding the basics of RRIFs with BMO’s James McCreath

May 12, 2022

Most Canadians understand what registered retirement savings plans (RRSPs) are.

What’s perhaps a little less well known is the registered retirement income fund (RRIF), which is where your RRSP funds generally end up once you move from saving for retirement to spending your retirement income.

Save with SPP reached out to James McCreath, a portfolio manager at BMO Wealth’s Calgary office, to get a better understanding of the basics of RRIFs.

We first learned that McCreath has strong connections to Saskatchewan – both his parents are from here, his mom, Grit McCreath, is Chancellor of the University of Saskatchewan, and the family enjoys time at their cottage north of Prince Albert at Waskesiu Lake.

RRIFs are the vehicle used to turn former RRSP savings into retirement income, he explains.

“You have to convert from an RRSP to a RRIF by the end of the year you turn 71, and must start withdrawing from the RRIF by the end of the year you turn 72,” says McCreath. That potential deferral period, he points out, gives you a 24-month window from the point your RRSP is converted to when you take the first dollar out.

While it is possible to convert to a RRIF earlier than age 71, not many people do, McCreath explains. Such a decision, he says, would be based on an individual’s unique circumstances – perhaps they want “certainty for budgeting,” or other reasons. It’s possible, but rare he says.

While there’s no tax on the interest, dividends or growth within a RRIF, the money you take out of it is taxable. McCreath says the tax on RRIF withdrawals is the deferred tax you didn’t pay when you put money into an RRSP in the past.

Asked if there is a correct or best investment strategy for a RRIF, McCreath says that this again depends on “the circumstances of the individual.”

Generally, a RRIF investment strategy should consider the cash flow needs of the individual, and their tolerance for risk, explains McCreath.

Someone who needs the RRIF income for day-to-day expenses might, for instance, be less interested in risky investments, and would focus on fixed income investments, he says. “These days we are starting to see five-year GICs (guaranteed income certificates) that pay four per cent interest; we haven’t seen them at that rate for years, so that might be a consideration” for risk-averse RRIF investors.

Others with less cash flow needs for the RRIF – perhaps those who retired with workplace pensions – might be able to handle a riskier investment strategy. “They might want to hold equities under the hope that their RRIF grows, for legacy purposes,” he explains.

“I strongly advise people to find an investment professional, or an accountant, who can help develop the optimal plan for their own circumstances,” McCreath says.

On the issue of RRIF taxation, McCreath points out that taking money out of the RRIF is different than taking it out of an RRSP.

There is a minimum amount that you must withdraw from your RRIF each year, a percentage that gradually increases as you get older, he explains.

When you take money out of an RRSP, an amount of tax is withheld at source for taxes (beginning at 10% for withdrawals up to $5,000). No such taxes are automatically withheld when you withdraw the minimum prescribed amount of money from a RRIF.

If you are concerned about having to pay taxes at income tax time because of RRIF income, McCreath says you can often arrange to have the RRIF provider deduct a set amount of tax above the mandated minimum tax withholdings from each withdrawal. In this way, you will help avoid having to make a large payment at tax time, assuming the appropriate amount of tax gets withheld, he explains.

Another good idea, he says, is to use any RRIF income (net of tax) that you don’t need as a contribution to your Tax Free Savings Account (TFSA). “If you don’t need the capital for day-to-day living, you can continue to invest it in the TFSA,” he explains.

An alternative to a RRIF at the end of your RRSP eligibility is the purchase of annuity. Annuities, like a pension, provide a set income each month for life, and many annuity providers offer a variety of options for them around survivor benefits.

The current sharp rise in interest rates may increase interest in annuities, McCreath suggests.

“As interest rates rise, the functionality and usefulness of annuities go up,” McCreath notes. Generally speaking, the higher the interest rate at the time of purchase is, the greater the annuity payment will be.

McCreath concluded by offering two key pieces of advice. First, he notes, a lot of retirement decisions, such as moving to a RRIF or buying an annuity, are important and “irrevocable” ones. It’s important to get professional advice to help you make the decision that’s best for you, he says.

As well, he says, pre-retirees should have a very clear understanding of their cash flow, and “the matching of inflows to outflows,” before they begin drawing down their savings.

We thank James McCreath for taking the time to talk with us.

Saskatchewan Pension Plan members have several options when they want to collect their retirement income. They can choose among SPP’s annuity options, SPP’s variable benefit (available for Saskatchewan residents), or transfer their money to a Prescribed RRIF. Check out SPP’s Time to Collect Guide for more details!

Debt can squeeze the spending power of seniors: Scott Terrio

March 10, 2022

Scott Terrio knows all about the issues facing senior retirees.  Terrio, who is Manager, Consumer Insolvency at Hoyes, Michalos Licensed Insolvency Trustees, recalls doing “a lot of speaking engagements for senior groups” about money and debt. He said “retired people, who have lived a long time, ask a lot of questions (about finances), and they are certainly not a retiring bunch.”

Save with SPP spoke recently with Terrio by phone.

He says that debt is a problem for retirement, “both at the front end and the back end.” Debt can certainly encroach upon the money people want to set aside for their retirement, he explains, but it is even a bigger problem for those who are actually retired.

“Life is expensive,” says Terrio. As interest rates declined, and people’s equity grew, retirees – most living on a fixed income — began taking on debt for the first time. Seniors, he explains, began tapping into their equity for “various things,” such as helping the kids and grandkids get ahead and buy homes. These days, many have tapped into credit to pay for day to day living, he says.

Today’s retired seniors began making use of their equity, but at the same time, began to live longer. “People are living much longer than ever before. Retirement can last for 30 years or more.”  That can be costly, Terrio says. “The cost of (long term care) will kill you financially,” he says. “Care is very expensive – thousands a month – and that adds up if you live into your 90s.”

Retirees typically get into trouble gradually, he says. A lot of newly retired seniors don’t realize that they will usually owe income tax unless they have their pensions and government benefits adjusted to withhold more tax. “They are used to being on payroll, where someone takes the tax off for you. That doesn’t happen when you’re retired, and you can find yourself in a hole.”

Owing the Canada Revenue Agency for unpaid taxes isn’t usually a huge debt, but if you don’t have money to pay it, it can be “the straw that breaks the camel’s back,” he explains.

It’s having to pay for things like taxes that starts seniors looking at credit, and debt, he notes.

Once you use up your credit card room, “the banks love giving lines of credit and higher credit card limits to seniors, who tend to have equity, and since nine of 10 of them tend to pay it back.”

That’s why the expected jump in interest rates is also concerning, Terrio says.

“When interest rates go up, they have a direct effect on lines of credit,” he says. “Even an increase of $100 a month in interest payments is bad news for a senior. Now they have to pay that every month. And since the real rate of inflation is probably six, seven or even eight per cent, everything you’re buying is now more expensive and you have less money to spend. That’s the main issue.”

Debt is not something people get into on purpose. “In any age category, very few get into debt intentionally. It’s a gradual creep, usually driven by events such as loss of a job, sickness, divorce. You can maybe absorb one of these things at a time, but two – no way.”

As well, older Canadians want to help their children and grandchildren save for education and housing. “We are seeing the greatest intergenerational wealth transfer of all time,” Terrio says. And that can use up savings and leave people with debt as their only option.

The problem with debt is that it no longer is seen as a bad thing, Terrio says.

Maybe, he says, older folks once saw debt as shameful, but it is “not a shame thing” for many Gen X, Gen Y or millennials. “The younger people get accustomed to it, they less they are bothered by it.”

The problem, he concludes, is that debt “is seen as cash flow as opposed to debt.” People need to remember that credit card and line of credit money “isn’t your money… it’s the bank’s money.”

We thank Scott Terrio, who many years ago worked in Swift Current for a major farm equipment company, for taking the time to speak with us. Did you know that the money in your Saskatchewan Pension Plan account is locked in until you reach retirement age, and is also creditor-proof? If you run into financial troubles on your way to retirement, your SPP nest egg will be unaffected. It’s another great feature of the SPP.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Four pillars key to “optimal well-being in retirement,” Edward Jones survey

March 3, 2022

Save with SPP recently reached out to Andrea Andersen, Principal, Western Canada Leader and Financial Advisor at Edward Jones for the company’s thoughts on a recent survey on retirement carried out by the firm Age Wave. Here are her answers to our questions.

We were interested that “purpose” is seen as one of the four pillars along with health, family and finances. This suggests that maybe the research shows people are looking for more meaning in their retirement than perhaps in the past. Is that your impression too and can you expand on why purpose has become (apparently) more important?

Absolutely – one of the biggest insights from our study was that the majority of retirees say that all four pillars—health, family, purpose and finances—are interdependent and essential to optimal well-being in retirement. We were also surprised to see just how crucial purpose is to retirees, as 92 per cent surveyed said that having purpose is key to a successful retirement. 

One reason for the prioritization of purpose is that scientific research has shown that having a sense of purpose can actually reduce the risk of cognitive decline, cardiovascular disease and depression, and is essential to a long, healthy and potentially cost-saving retirement. Another reason we found was that having purpose helps retirees feel both useful and youthful. Nearly all (93 per cent) retirees say it’s important to feel useful in retirement, and 87 per cent also say that being useful helps them to feel youthful.

Retirement is a time of enormous freedom, but that same freedom from work and family responsibilities can also create a missing link when it comes to how to live a life filled with purpose. During the pandemic, we’ve seen many retirees have taken on new roles and responsibilities, such as providing childcare to grandchildren, shopping for higher risk neighbours, and providing emotional comfort to family and friends. These stepped-up roles have given retirees a greater sense of purpose and connection.

The idea that COVID is causing some people to postpone retirement is interesting, but we were also interested to learn that 20 million Americans and two million Canadians stopped making retirement contributions during the pandemic. What caused this – lack of employment and tight finances? Pessimism about the timing of their retirement? We’d be interested in your views on why people paused retirement savings.

Our study showed that the pandemic’s effect on finances has not been equally distributed by age, wealth, gender, or retirement status. The greatest negative impact has been felt by Gen Z and Millennials and the least by Silent Gen, who have the safety nets of pensions, Social Security, and other means to provide financial security.

One of the biggest financial challenges we saw impacting Americans and Canadians alike during the pandemic is what’s been dubbed the “she-cession,” or the deepening of the economic gender gap. Women were more likely to lose their job or exit the workforce due to the challenges of COVID-19. They have also been far more likely to take on the lion’s share of time spent caring for family members, including home-schooling children and providing eldercare to parents. One of the outcomes of this is that only 41 per cent of women planning to retire said they were saving each month for retirement, compared to 58 per sent of men.

Pressing short-term financial needs have also taken precedence over longer-term goals. Combined with the existing gender pay gap, the headwinds facing women saving for retirement present a serious challenge. It’s crucial for women – and anyone facing retirement savings shortfalls – to work with a trusted financial advisor to determine a holistic financial plan to prepare for short and long-term financial goals.

The healthspan vs lifespan findings were equally fascinating, we had not heard it expressed that way before. The idea that a significant chunk of retirement may be in poor health doesn’t seem to get discussed often. Do you have any additional thoughts on that topic – should people, for instance, think about planning for a period of poor health where their care costs will be higher?

We know that money is an essential ingredient in retirement planning, but it’s not the only one. On average, the World Health Organization reports that the gap between life expectancy and healthy life expectancy, defined by the years lived in full health and free from disability, is 10.9 years for Canadians. That discrepancy tends to fly under the radar when pre-retirees are counting down the days until they can pursue their retirement dreams.

Saving for long-term care is a priority for many of my clients, who have seen older relatives suffer from medical issues – from suffering from a broken hip to cognitive decline caused by Alzheimer’s disease. These situations can leave retirees needing assistance from short-term hospital stays to full time care through hospice. For those concerned about the rising costs of long-term care and the potential financial impact it may have on them and their families, it might be worth considering long-term care insurance.

An advisor can help you identify which long-term care costs might be covered by your existing insurance and where additional coverage is needed. It’s important to weigh the benefits of insurance with its costs versus the risk of not having it and needing it. There’s always the possibility that you’ll pay for coverage you’ll never use, but I recommend it for clients who may not have the coverage to pay for these potential needs.

Finally, what surprised you most about the findings of this research?

I think the most surprising finding from the study was that 77 per cent of those planning to retire wish there were more resources available to help them plan for an ideal retirement beyond just their finances. This is hugely important as the vast majority of retirees surveyed say that in addition to saving for retirement and managing finances in retirement, it is important to think about all the other factors that contribute to a healthy retirement.

This research reminds me to challenge clients to think about the other aspects of their retirement planning outside of the finances. I now make sure to respectfully ask clients about their non-financial retirement goals, from where they will live to which activities will give them a sense of purpose, to get the conversation flowing.

We thank Andrea Andersen for taking the time to answer our questions. If you’re interested in saving for retirement – but aren’t all that sure how to go about it – the Saskatchewan Pension Plan may be the answer you’ve been looking for. Send SPP your pension contributions, and they will be professionally invested, grown, and at retirement, paid out to you as retirement income, with the option of receiving a lifetime annuity.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.

Pension dollars are a boost for Canada’s economy, study says

December 16, 2021

A new study has found that every $10 of public sector pension that is paid out to a retired member returns $16.72 of activity in the Canadian economy.

The study was produced by the Canadian Centre for Economic Analysis on behalf of the Canadian Public Pension Leadership Council.

Save with SPP spoke with Derek Dobson, CEO and Plan Manager of the Colleges of Applied Arts & Technology Pension Plan (CAAT) and a Co-chair of the Council, to further explore the survey’s results, and to talk generally about the value of pension programs.

He notes that the study is “agnostic” about what type of pension plan is producing the $10 spent by its retired members.

“Any plan that uses experienced investment professionals, and pooling – I include the Saskatchewan Pension Plan as an example of that – is delivering pensions efficiently,” he explains. So whether the $10 is produced by an efficient defined benefit (DB) plan or an efficient defined contribution (DC) plan, the economic benefits are the same.

The study noted that – looking at public sector pension plans only — $82 billion of economic activity was generated in 2019, “supporting 877,100 jobs and $33 billion in wages for Canadians,” according to the study’s executive summary. Governments gain $21 billion in tax revenue, the study notes. Collectively, Canadian public sector DB plans have an eye-popping $1.27 trillion in assets.

While the study found pension spending generally benefited all Canadians, one interesting aspect was that rural businesses seemed to derive more positive gain from local public sector pensioners.

Dobson says part of the reason for this may be the current trend towards a migration from expensive city living to more affordable smaller centres. “The housing is more affordable in smaller cities and towns,” he says. “We also found that those living in smaller towns tend to spend more locally than those in cities – so that is part of the reason the economic benefits of pensioners had a 6.5 per cent bump” in rural areas when compared to urban centres.

Given the “win win” nature of having a good pension plan – the retired member gets the steady, predictable income, while the economy benefits from it being spent – we asked Derek Dobson if there should be wider availability of good pension plans for those who lack them.

CAAT’s own DBplus pension plan, a program that offers a strong, secure lifetime pension program, has grown in just two years to include 200 participating employers. “We are trying to remove barriers to access to good pensions,” Dobson explains.

A good pension, he explains, has the added benefit of helping employers attract and retain good employees. It delivers twice the retirement benefits per dollar saved than investing independently in Group RRSPs, and helps employees reach their retirement goals faster with employer-matched contributions. Dobson says it is a shame to see well-trained healthcare workers and engineers leave the country for jobs elsewhere – a good pension program can keep them here in Canada.

Another advantage for employers is that if a pension plan is offered by a third party rather than being administered and funded by the employer, it’s a time, risk and funding relief for the employer. “No Chief Financial Officer in the private sector wants to see pension liabilities on their balance sheet,” he explains. With DBplus, the employer’s pension cost is a fixed amount.

“Many studies have shown that year after year, more and more Canadian workers are willing to forego more pay in order to get a better pension,” he says.

The only three organizations he currently sees as trying to bring pension coverage to underserved sectors are CAAT, through its DBplus program, the OPSEU Pension Trust, through its similar OPTrust Select plan, and the Saskatchewan Pension Plan through its voluntary, open defined contribution program.

Dobson concludes by saying that Canada has become known around the world for the efficiency of its pension system, the “Maple Model” of pension plan that feature pooling, low administration costs, expert investing, and joint governance where members and employers have an equal say in how the systems are run.

“Public service pension plans are an amazing and unique asset for Canada. So the more people that can be brought in, the better – pensions really help workers, retirees, their families and the economy.”

We thank Derek Dobson for taking the time to speak with us.

Did you know that the Saskatchewan Pension Plan has, according to its 2020 Annual Report, has more than $528 million in assets and 32,613 members? This growing open defined contribution plan is designed specifically for those without a workplace pension – a made-in-Saskatchewan solution to the problem of retirement saving for individuals and businesses. Check them out today.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.