CPP

Annuities can give your retirement income a strong, solid core

September 30, 2021

Financial planner Jonathan Kestle of the Ian C. Moyer Insurance Agency in Ingersoll, Ont. sees annuities as a great way to strengthen the core of your retirement income strategy.

Talking to Save with SPP by phone, Kestle says he sees annuities as “one of our core planning philosophies.” He notes that while the Canada Pension Plan (CPP) and Old Age Security (OAS) may provide a “foundation for retirement,” people should look at their fixed expenses in retirement.

If CPP and OAS don’t cover off those month-to-month expenses like housing, heat, telephone, and utilities, then a good strategy would be to annuitize some of your personal savings to top that up.  CPP, OAS and an annuity will offer a “cash for life” core income amount that will cover off your basic expenses, he explains. Your other savings provide you with liquidity for “non-core” expenses.

Asked if an annuity offers any tax advantages over withdrawing money from a registered retirement income fund (RRIF), Kestle said not really, since both will have tax withheld at source. On the other hand, a non-registered annuity (an annuity purchased with non-registered funds) can offer significant tax advantages, since tax is set at a fixed rate over many years, he says.

The advantages of an annuity include the fact that “longevity risk,” or the fear of outliving your savings in retirement, is covered off, since an annuity is a “cash for life” product.

Put in perspective, Kestle explains that with a RRIF, you can arrange to have a set amount of money withdrawn each month, like an annuity. The difference is that with the RRIF, if investment returns don’t support the rate of withdrawal over time, you can run out of money while you are still alive. With an annuity, you can’t outlive your savings, he explains.

It’s important to realize, he says, that once you purchase an annuity, you lose control over that money in exchange for receiving guaranteed monthly payments. If you die at an early age, and don’t select an annuity that offers a survivor benefit, your “foregone” payments are used to help provide payments to other annuitants by the insurer via a “pooled risk” approach, he says.

This fear of dying early keeps some people on the sidelines with annuities, but statistically it is quite a rare thing, with most people living into their 80s and beyond, he says.

But if you are concerned about leaving benefits to your survivors, Kestle says, annuities offer a lot of options. You can choose one that offers a joint and survivor pension to your spouse, some will offer a guaranteed payment for a number of years, others will offer a return of premium if you die at a young age. “The more bells and whistles, the less the monthly payment is,” Kestle explains.

Kestle does not believe people should annuitize all their retirement savings. He reiterates that his firm advises reviewing core expenses, seeing if there is a shortfall between what your government benefits provide and what you need for core, fixed expenses, and then annuitizing some of your savings to cover the shortfall.

“You should consider annuitizing a portion of your savings; it shouldn’t be an `all or none’ decision,” he explains. You will need “pools of liquidity” in your savings for emergencies, such as having to put on a new roof. Kestle concludes by saying annuities “play a very important role” in a diversified retirement income portfolio.

We thank Jonathan Kestle for taking the time to talk with us.

Did you know that the Saskatchewan Pension Plan offers a number of annuity options? According to the SPP Retirement Guide, members can choose from these options – a life only annuity, which offers no survivor benefits; a refund life annuity which guarantees a refund to your beneficiary if you have not received the full balance of your SPP account as retirement income; and a joint and last survivor annuity where your beneficiary gets a lifetime pension upon your death equal to 60, 75 or 100 per cent of what you were receiving. Check out SPP, celebrating 35 years of delivering retirement security, today!


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.


Navigating the complexity of the golden years: The Boomers Retire

August 26, 2021

The concept of retirement “has grown increasingly more sophisticated,” begin authors Alexandra Macqueen and David Field in their new book, The Boomers Retire.

“Canadians preparing for retirement,” they write, “have been able to contemplate a variety of highly personalized approaches – from early (or even very early) retirement, to phased retirement, working retirement, and more.”

This thorough book covers all matters retirement and boomer with clear, concise explanations, tables, charts, and focus.

Early, we learn about three “realities” in today’s retirement world – the amount of time we are retired is “increasingly longer,” that retirement is much more diffuse than the old “retire at 65” days of the past, and that funding retirements that may last longer than one’s working years is “increasingly complex.”

Workplace pensions aren’t as common as they were in the past, especially in the private sector, so many of us have to rely on government benefits, the authors explain. But Canada Pension Plan and Quebec Pension Plan maximum benefits are just over $1,200 a month, and worse, the “average benefit amount for new recipients is $710.41 per month, or about 60 per cent of the maximum.”

Old Age Security provides another $7,384.44 annually, but is subject to clawbacks, the authors observe. Lower-income retirees may qualify for the Guaranteed Income Supplement, we are told.

Those without a workplace pension plan (typically either defined benefit or defined contribution) will have to save on their own.

In explaining the difference between two common do-it-yourself retirement savings vehicles, the Tax Free Savings Account (TFSA) and the registered retirement savings vehicle (RRSP), the authors call the TFSA “a nearly perfect retirement savings and retirement income tool” since growth within it is free of tax, as are withdrawals. They recommend a strategy, upon withdrawing funds from an RRSP or registered retirement income fund (RRIF) of “withdrawing more than needed… and instead of spending that extra income, move it over to the TFSA.”

Our late father-in-law employed this strategy when decumulating from his RRIF, chortling with pleasure about the fact that he received “tax-free income” from his TFSA.

The book answers key timing questions, such as when to open a RRIF. Planners, the authors write, used to advise waiting “until the last possible moment” to move funds from an RRSP to a RRIF, at age 71. “The problem with this approach,” they tell us, “is that it sometimes results in low taxable income between retirement and age 71.” If you are in that situation, be aware that you don’t have to wait until 71, and can RRIF your RRSP earlier, they note.

A section on annuities – a plan feature for SPP members – indicates that they address the concern of running out of money in retirement, as annuities are generally paid for life. The trade-off, of course, is that you don’t have access to the funds used to provide the annuity.

Other retirement options, like continuing to work, taking a reverse mortgage, and starting your own business, are addressed. There’s a nice section on investing that looks at the pros (security) and cons (low interest rates) of bonds, how to treat dividend income, index exchange-traded funds, and more.

An overall message for this book, which is intended for both planners and individuals, is a focus on having an individualized strategy, rather than relying on various “rules of thumb.”

“Aiming for a smooth, even withdrawal over a retiree’s lifetime will often be the optimal approach,” the authors say. That’s complicated if, as our friend Sheryl Smolkin told us recently, your retirement income “river” comprises many different registered and non-registered streams. The authors say that a withdrawal rate of four per cent from your various retirement income sources is generally a good target.

Tax tips include remembering to claim medical expenses – many of us forget this category and miss out on tax savings – claiming the disability amount if you qualify, and taking advantage of income splitting. There’s a chapter on being a snowbird (there can be some unexpected downsides with it) and going the rental route in your latter years, when “the future is now.”

This clear, detailed, and very helpful book is a must for your retirement library.

If you’re a member of the Saskatchewan Pension Plan, you’ll have the option at retirement to choose from a variety of great annuity products. Some offer survivor benefits, including the Joint & Survivor option where your surviving spouse will continue to receive some (or all) of your pension after you are gone. It’s a solid part of the SPP’s mandate of delivering retirement security, which it has done for more than 35 years.

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.


July 26: BEST FROM THE BLOGOSPHERE

July 26, 2021

Your 20s may be the best time to start saving for retirement

Writing for Yahoo! Finance, Phoebe Dampare Osei points out that your 20s is a good time to start saving for retirement.

“Your 20s is that decade where society says you’re old enough to have some responsibilities, but young enough that you haven’t quite settled down yet,” she writes. She notes that statistics from the U.K., where she is based, show most couples aren’t getting married until their 30s these days, a big change from the 1970s when they married younger.

Similarly, U.K. stats show people aren’t buying their first homes until they are in their 30s or older, she adds.

“But what about life after 60? It may seem odd to be thinking so far ahead, but your future you, will thank your present you, if you take care of yourself now,” writes Dampare Osei. We love that sentiment!

Her suggestions:

  • “In your 20s you have fewer responsibilities than someone much older, so it’s easier to save now than a lot more later with more financial pressure.”
  • “State pension alone will not cover you — check with your employer to make sure you are eligible and auto-enrolled.” (Auto-enrolment in a workplace pension plan is not a common practice in Canada – so here at home it’s up to you to find out if there’s a retirement plan and how you can qualify to join it.)
  • “If you do not have enough money saved for retirement you may have to keep working beyond state pension age. Working into your 70s if you don’t have to and don’t want to doesn’t sound like much fun.”

This last point is very true. Many people without retirement savings simply say to themselves well, I’ll keep working until 70. That sounds great when you are younger and healthier, but will you be healthy enough to keep punching the clock by age 70? Not everyone is.

She raises a good argument about state benefits not being all that great.

To Candianize this a bit, the current maximum benefit from the Canada Pension Plan is $1203.75, but the average amount is $706.57, according to the federal government’s own site.

The maximum Old Age Security payment, again per the government’s web, is $626.49.

In fairness to the government, these benefits were never intended to provide the only income people receive in retirement – when they were launched, most people had workplace pensions, and these programs were designed to supplement that.

So the most anyone could get from both programs is a little over $1,800 a month – and not everyone qualifies for the maximum.

The point Dampare Osei makes is a very good one. When you are young, single, and just starting out in the workforce, you probably don’t have as many expenses as you will when you’re in your 30s, married, raising kids and paying a mortgage. So it’s a good time to start your retirement savings program.

Another great reason to start early is the “magic” of compounding. The longer your money is invested, the more dividends and interest it will accrue.

As an example, the Saskatchewan Pension Plan has averaged an eight per cent rate of return since its inception 35 years ago. And while the past rate of return is of course no guarantee of what SPP will do in the future, the track record is worth noting. If there isn’t a workplace pension plan to sign up for, the SPP may be just the thing for you. And as Dampare Osei correctly notes, your future you will be very pleased if the current, youthful you gets cracking on retirement now rather than later.

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.


June 28: BEST FROM THE BLOGOSPHERE

June 28, 2021

Doing it yourself can lead to missteps, particularly for retirement planning

Let’s face it. More than likely, the person you see in the mirror each morning is also your “retirement planner.” And, writes noted financial columnist Jason Heath, writing in the Sarnia Observer, the best estimates of do-it-yourselfers can often miss the mark.

Here are some things to watch out for.

We may mess up the key question of how much is enough to save, he writes. The math is complicated, he explains. While one might think that one million dollars supports $50,000 a year withdrawals for 20 years, Heath points out that growth has to be factored in.

“$1 million invested at a four per cent return will generate $40,000 in the first year, meaning a $50,000 withdrawal will reduce the account balance by just $10,000. Depending how the money is invested, the investment fees payable, and other factors, $1 million may support $50,000 of annual withdrawals for 30 years or more,” he writes.

Tax rates in retirement are significantly lower in retirement, and most folks overestimate their tax bill. You’ll be earning less so that will chop your tax bill, and “income like eligible pension income, capital gains, and Canadian dividends are eligible for tax credits or reduced income inclusion rates. Married couples can also split income more easily in retirement to minimize their combined family tax,” he writes.

Expenses are usually overestimated. Heath notes that in most cases, once you are retired you won’t be paying off a mortgage, the kids will be educated and gone, and you’ll no longer be saving for retirement.

A common mistake people make is starting their government retirement benefits either at age 65 or earlier. “Deferring CPP or OAS after age 65 results in an increase in both pensions for every month of deferral. Retirees who live well into their 80s or 90s will receive more lifetime pension income for delaying their pensions to age 70 than starting early,” he writes.

Heath cites a 2018 research paper that questions the old “rule of thumb” that your current age equals the percentage of your investment portfolio that should be in fixed income. While he is not advocating going “all in” on stocks, “but holding a low allocation to stocks is unlikely to maximize a retiree’s spending or estate value.’

Lastly, he points out the risk of longevity – most people are living into their 80s, 90s and even beyond. People, he writes, “should plan for a 30-year retirement.”

Most of us boomers were raised by Depression-era parents who were brought up in a “make do” environment where costly things like medical, financial, and even home repair support were automatically shunned. Long-distance phone calls and cab rides were rare events, associated with the annual Christmas phone call to the grandparents or the extremely rare need to take a cab – usually, only done if the car needed to be left at home when travelling by train, for example.

However, we are not jacks and jills of all trades, so getting a little professional advice is not such a bad idea, especially with retirement planning. Why not consider the Saskatchewan Pension Plan – they’ll invest your retirement savings professionally, at a very reasonable cost, and when it’s time to live on those savings, you can choose annuity options that will ensure you never run out of money, no matter how long you live.

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.


June 14: BEST FROM THE BLOGOSPHERE

June 14, 2021

Boomers don’t think they’ll have enough – but aren’t aware of potential healthcare costs in retirement

It’s often said that if you don’t have a workplace pension plan, you will have to fall back on the “safety net” of the Canada Pension Plan (CPP), Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). You’ll be able to augment those benefits with your own Registered Retirement Savings Plan (RRSP) nest egg, the party line suggests.

But new research from HomeEquity Bank and Ipsos, reported on by The Suburban, finds that 79 per cent of Canadians 55 and older “say they can’t bank on RRSPs, the CPP and OAS for a comfortable retirement.”

In short, they don’t think those sources will provide them with as much income as they want.

The survey goes on to note that “four in 10” of the same over-55 group think they may have to “access alternative lending options for their retirement planning toolboxes,” including accessing the equity in their homes via a reverse mortgage.

Traditionally, the article notes, older folks would “downsize” the family home, selling it and buying something smaller and/or cheaper. “That’s long been considered the right thing to do,” the article tells us.

However, states HomeEquity CEO Steven Ranson in the article, “downsizing isn’t as attractive as it used to be. Given the amount of risk associated with moving and finding another suitable home, more than a quarter of older homeowners are considering accessing the equity in their homes instead of selling to help fund their retirements.”

What could be behind this concern over retirement income?

One possibility is the possibility of expensive post-retirement healthcare costs, suggests an article in Canadian HR Reporter.

The magazine cites research from Edward Jones as saying that “66 per cent (of Canadians 55+) admit to having limited or no understanding of the health and long-term care options and costs they should be saving for to live well in retirement.” The article says that the cost of a private nursing home room – on average, in Canada – is a whopping $33,349 per year.

While not all of us wind up in long-term care, one might assume that you want to make sure you still have a little money set aside for that possibility – right?

The Edward Jones survey found that 23 per cent of those surveyed feel their retirement savings will last them only about 10 years, the article notes. Thirty-one per cent don’t know how long their savings will last, the article adds.

This is a lot to take in, but here’s what the survey results seem to tell us. Boomers worry they won’t have enough money in retirement – and many aren’t aware of the huge cost of long-term care late in life. Perhaps those who are aware of long-term care costs are realizing they might run short in their 80s or beyond?

So what to do about this? First, if you can join a pension plan at work, do. Often, your employer matches your contributions, and the income you’ll receive in retirement is worth a small sacrifice in the present.

No pension plan to join at work? No problem – the Saskatchewan Pension Plan has all the retirement tools you need. For 35 years they’ve delivered retirement security by professionally investing the contributions of members, and then providing retirement income – including the possibility of a lifetime annuity – when those members get the gold watch. Check them out today.

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.


June 7: BEST FROM THE BLOGOSPHERE

June 7, 2021

In Japan, has 70 become the new 60?

Here in Canada, 70 is the latest you can start taking your Canada Pension Plan payments, and a date when you can begin thinking about what to do with your registered retirement savings plan.

But in Japan, according to HRMAsia, it’s the new retirement age – up from age 65.

Companies, the magazine reports, will now be “required to retain workers until they are 70 years old.” The reason for this legislative change, we are told, is two-fold. Due to the fact that Japan has a falling birthrate and an aging population, there’s a labour shortage. The aging population is also driving up the cost of pensions, the article notes.

The legislation’s main focus is allowing workers to stay on the job longer. The old retirement age of 65 is no more, the article says, and legislation permits workers to stay on past the new, higher age limit of 70, or to work in retirement as freelancers.

It’s an interesting decision. Here in Canada, there was talk at one time – and later, federal legislation – that would have moved the start of Old Age Security to age 67, for some of the same reasons the Japanese are citing. While the present government reversed this plan, we are now experiencing some of the same issues Japan is experiencing. It’s something to keep an eye on.

Could we see an era of super inflation once again?

When we tell the kids that we once lived through an era where wage and price controls limited our pay raises to six per cent – and where mortgages and car loans had teenage interest rates attached to them – their eyes doubtless glaze over at this litany of impossible-sounding boomer factoids.

Could the crazy interest rates we saw in the ‘80s ever return?

One U.S. professor says yes. Speaking to CNBC in an article carried in Business Insider, Prof. Jeremy Siegel of Wharton says “I’m predicting over the next two, three years, we could easily have 20 per cent inflation with this increase in the money supply.” The increased money supply Stateside is due to “unprecedented” fiscal and monetary stimulus, he states.

Money supply is up 30 per cent since the beginning of 2021.

“That money is not going to disappear. That money is going to find its way into spending and higher prices,” Siegel states in the article.

“The unprecedented monetary expansion, the unprecedented fiscal support, you know, I think excessive, was first going to flow into the financial markets, into the stock market, and then once we’re reopening, and we’re right at that cusp, it was going to explode into inflation,” he concludes.

When you’re saving for retirement, it’s usually a very long-term deal. You may not starting drawing upon any of your savings until you are 70, and there’s a chance you will still be banking on retirement money until you are in your mid-90s. So a balanced approach, a portfolio that has exposure to Canadian and international stocks, bonds, real estate and other sectors is the way to go to avoid having all your nest eggs in the same basket. If you don’t want to take on nest egg management yourself, rest assured that the Saskatchewan Pension Plan is there to manage things for you. Their Balanced Fund has averaged an impressive eight* per cent rate of return since the plan’s inception 35 years go.

*Past performance does not guarantee future results.

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.


OAS still doing the job, says CCPA economist Sheila Block

May 27, 2021

Recent changes to the federal Old Age Security (OAS) program, including two one-time extra payments of $500, and a plan to increase the program’s payout by 10 per cent for those 75 and over, shouldn’t impact Ottawa’s ability to sustain the program.

So says Sheila Block, chief economist for the Canadian Centre for Policy Alternatives (CCPA), Ontario branch.

On the phone to Save with SPP from Toronto, Block notes that unlike the Canada Pension Plan (CPP), OAS isn’t funding through contributions and investment returns like a private pension plan – it’s a government program, paid for through taxation. So, she says, if planned changes go ahead there is “absolutely… the capacity for the government to afford it.”

While OAS is a fairly modest benefit, currently about $615.37 per month maximum, Block notes that it has an important feature – it is indexed, meaning that it is increased to reflect inflation every year.

“This acknowledges that a lot of retirees’ pension plans are not indexed,” she explains, or that they are living on savings which diminish as they age. An indexed benefit retains its value over time.

Many people who lack a workplace pension and/or retirement savings will receive not only the OAS, but also the Guaranteed Income Supplement (GIS), which is also a government retirement income program. OAS and GIS together provide about $16,000 a year, which is helpful in fighting poverty among those with lower incomes, she explains.

“OAS was not designed to support people on its own,” she explains. “And the GIS is an anti-poverty measure that supplements OAS. As we see fewer people with defined benefit pensions or adequate retirement savings, there is an argument to increase OAS, for sure.” But, she reiterates, the OAS is more of a supplement than it is a program designed to provide full support.

As well, she notes, many getting OAS and GIS also get some or all of the CPP’s benefits.

Save with SPP noted that much is made about the OAS clawback in retirement-related media reports. But, Block notes, in reality, the threshold for clawbacks is quite high. The OAS “recovery tax” begins if an individual’s income is more than about $78,000 per year, and you become ineligible for OAS if your income exceeds about $126,000, she says.

A 2012 research paper by CCPA’s Monica Townson, which made the case then that OAS was sustainable, noted that only about six per cent of OAS payments were clawed back.

Citing data from the Canada Revenue Agency, Block notes that today, only about 4.4 per cent of OAS payments are “recovered” through the recovery tax.

We thank Sheila Block for taking the time to talk with Save with SPP.

Retirement security has traditionally depended on three pillars – government programs, like CPP and OAS, personal savings, and workplace retirement programs. If you don’t have a workplace pension plan, you’re effectively shouldering two of those pillars on your own.

A program that may be of interest is the Saskatchewan Pension Plan. This is an open defined contribution program with a voluntary contribution rate. You can contribute up to $6,600 per year, and can transfer up to $10,000 from your registered retirement savings plan to SPP. They’ll invest the contributions for you, and when it’s time to retire, can help you convert your savings to income, including via lifetime annuity options. Check them out today!

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.


No “magic formula” for decumulation, but frugality and realism help retirees: Dr. John Por

April 29, 2021

Recently, Save with SPP got an opportunity to speak with long-time pension expert Dr. John Por, whose 40-year career in pensions includes consulting work with large U.S. and Canadian pension boards and offering expertise on pension risk policy. He has also researched the tricky “decumulation” stage in which savings are turned into retirement income.

Our far-ranging interview covered decumulation, spending in retirement, frugality, advice on saving for retirement, and annuities.

Decumulation

Dr. Por says common mistakes with decumulation – the stage where retirement savings are used to provide retirement income – can include problematic asset allocation, lack of appropriate goal setting, high investment costs and, often, setting a withdrawal rate that’s too high or taking out too much money early in retirement.

So is there a correct withdrawal rate?

“At one point in time, maybe 20-25 years ago, four per cent was said to be the right withdrawal rate,” he explains.

Decumulation “depends on future interest rates, the stock markets, inflation, life expectancy and income needs,” says Dr. Por. A “correct” rate “is therefore unknowable.”

“It depends on the reigning circumstances, both personal and market,” he explains. “Who could have predicted, even five years ago, the current existing zero or the negative real rate of bond returns?”

“The problem is, though we desperately want to find a magic formula, how can you do this – we don’t know how it will be (in the future); no one knows.”

Noting the volatility in the stock markets in just the last couple of years, he notes that “even a Nobel Prize winner professed not knowing where the markets will go in the next 10 years, or how to invest your money after retirement.”

“This, of course, has not kept the retirement or investment industry from providing copious, and often prudent, advice, it simply means that looking for a, or the, magic bullet, or the infallible sage, will not be successful,” he adds.

Spending in retirement

While decumulation carries a lot of unknowns, much more is known about how much retirees actually need, Dr. Por says.

He says research by noted pension actuary Malcolm Hamilton shows that people need far less “replacement income” in retirement than the 75 per cent figure bandied about by the industry. 

Hamilton has for many years said the research suggests not everyone needs to save “heavily” for retirement, because of the existence of government income programs for retirees and lower costs once you are retired. (Here’s a link to a Globe and Mail interview with Malcolm Hamilton.)

Dr. Por agrees, calling an overall 75 per cent rule “misguided.”

“While this may be true for low-income people, they are supported by the above-mentioned government programs, so for them the 75 per cent is not a stretch, people at higher income levels are not likely to need 75 per cent of their earned income to pursue an age-appropriate lifestyle,” he says.

“One of the most important steps to understanding (retirement spending) is… knowing how much money you need to survive,” Dr. Por explains.

Rather than going through “painful” pre-retirement budget forecasting, he recommends a simpler approach.

“How much do you save in a month? If the answer is zero, your retirement budget will be what you spend now, minus what you won’t have to pay in retirement.” This can include things like your mortgage, tax savings when you earn less, childcare and education expenses, Canada Pension Plan and Employment Insurance, and so on. 

It’s a common-sense issue, he says. Individuals must decide “how much is necessary (spending) versus how much you would like to have.”

This knowledge is crucial for retirees, who have extremely limited options in dealing with income shortfalls, he explains. 

Working Canadians needing more money could “work harder – get a job that pays better, spend less, save more, take more investment risks, etc.… but when you are retired, you don’t have the same tools,” he explains.

 “Lifestyle becomes the main tool, you can cut back on your lifestyle (to save money), which is difficult,” he says. “Another tool still at your disposal is taking on more investment risk in retirement, but, if you’re not successful, it would easily lead to a further diminished lifestyle,” Dr. Por adds.

Frugality 

At 74, Dr. Por says he is “still engaged” and “living frugally.”

In this context, he defines frugality as bringing your lifestyle and realistic earning capability (and not your hoped-for future earnings) into a healthy balance. 

Living frugally is a key way to make your money last longer, and also that when in financial trouble, the cutback would be smaller thus less painful. Big expenses in the early years of retirement should be avoided, he says, because you may need your retirement savings for decades. “

While at age 65 it is hard to envisage how long you may live” he explains, “you may easily live beyond age 90.”

For example, he adds, if you are married, “the probability that either you or your spouse will live to age 93 is about 50 per cent. You can live for a very, very long time.” 

Working after retirement is a way to support your retirement spending and to keep your mind active, he says.

“Some people still work part-time after they stop working full time. You don’t realize how important your work is … not that many people spend their time well in retirement,” he says.

“Apart from the income work provides, it also structures your day, can add meaning to your existence after retirement (admittedly not everybody needs it), and equally important, it helps you maintain your links with the outside world and friends,” he says. His observation is that most people (especially men) form the majority of their extra-family relationships through work, and once they retired such contacts tend to fade away over time,” he says.

Dr. Por recommends that everyone consider living frugally at any age; he sees it as a great lifetime habit to get into.

Saving for retirement

While some people suggest you should save for retirement from early in life until the end of your career, Dr. Por says that view isn’t usually realistic.

“You can’t save in your 30s and 40s – you are paying for your kids’ education, your mortgage. So, save what you can, if you can, but (know) you may not be able to,” he advises. “No heroism is called for, as you also have to live a reasonable life.”

The optimum time to save “is in your 50s, and then, you can save 20 to 40 per cent,” he says. By then, “your children will be out in the world, your mortgage is paid… you can save.”

For savers, equities add the most value, but of course, it depends on the environment you happen to fall into. Bonds don’t provide as much income and growth, Dr. Por explains.

Pay close attention to investment fees, he advises. “With exchange-traded funds (ETFs), you can control costs – the management expense ratios are low.” However, financial advisers may not suggest this investment because they can make higher commissions on other products, Dr. Por says.

“Even a fee of one percent can, over 30 years, reduce your available assets significantly,” he says.

What you want to avoid is being forced to sell securities when the market is down, thus Dr. Por likes the concept of having a cash reserve to tide you through periods of market decline. 

“If you take on extra risk… by putting more money into equities, you should also have a cash reserve fund worth three to five years of spending,” he says. If equities perform well, you may wish to extend such cash reserves to cover longer periods. Overall, Dr. Por says, a chief problem with retirement saving is that most people “look at it as an investment issue,” and become focused on today’s investment risks, interest rates, equity return rates, and so on. Instead, you should be thinking about the income your investments will generate when you stop working. 

What’s going on today with investment risks and other factors “is not relevant 30 to 50 years out,” when you will be drawing income from your investments, he advises. Your focus should be on that long term, and not on volatility or return rates in a given year, Dr. Por says.

Annuities

Dr. Por talked about the “annuity paradox”. While financial experts like annuities, most people refuse to follow such advice. Most people shy away from the idea of taking a large lump sum of money – say $1.5 million – and turning it into an annuity that pays $60,000 a year. He noted that when he mentioned the concept to his wife (a highly educated professional, an MD), she refused the idea saying that “… if we die soon for whatever reason the children will get nothing.”

Also, retired people want to have cash available for future expenses, and, not always unreasonably, are afraid of inflation, and the potential extinction of the financial institution, which issued the annuity. 

But, he added, “annuities later in life is a good idea”. When you are getting too old to run your money – say by your late 70s or 80s – that’s the time to consider an annuity, he says. The older you are when you convert to an annuity, the cheaper the annuity is to buy. And today’s low interest rates make the conversion to annuities expensive. “The interesting phenomenon is though”, he added, “that when interest rates were exceptionally high, say in the late 1990ies, people still did not buy annuities, nor did the advisers promote the idea.”

Finally, he noted the importance of discipline. He speaks from experience, and says that had he followed all the major precepts mentioned in this piece, he would be now in a much better financial position himself. “Know your needs, be prudent in your expectations, live frugally, create a plan or direction and stick to it while making adjustments, if needed,” he advises.  

We thank Dr. Por for taking the time to speak with us.

Celebrating 35 years of operations, the Saskatchewan Pension Plan is a full-service retirement plan. SPP will invest the money you contribute, and at the time you retire, gives you the option of converting your invested savings into a lifetime annuity. Why not check out SPP today?

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.


APR 26: BEST FROM THE BLOGOSPHERE

April 26, 2021

Could a pension model be the way to address the costs of long-term care in Canada?

Writing in the Globe and Mail, Professor Carolyn Hughes Tuohy of the University of Toronto offers up an interesting solution on how Canada could improve its long-term care sector – and part of her thinking relates to the way the Canada Pension Plan is funded.

Professor Tuohy notes that while there have been calls for “national standards” for long-term care facilities in the wake of the pandemic, a key problem is that long-term care is currently a provincial responsibility.

“How do we achieve a common threshold of provision while respecting Canada’s federal system?” she asks.

She writes about the idea of having some sort of “nationwide pool” of funding, so that the “longevity risk, that individuals will outlive their savings and be unable to afford long-term care,” could be addressed.

And, she writes, while provinces and local governments are “best suited” to deliver long-term care, that can lead to “inequitable variation across divisions.”

For instance, she notes, the fatality rate at long-term care facilities in Ontario has been about four times higher than that of British Columbia.

A solution, Professor Tuohy thinks, may be found by looking at the Canada Pension Plan/Quebec Pension Plan as a possible model.

“The Canada Pension Plan, paralleled by the Quebec Pension Plan, is jointly managed by federal and provincial governments. It provides a dedicated source of public finance, funded by contributions from workers and employers. It is designed to be sustainable and sensitive to demographic change, in contrast with the periodic haggling around the Canada Health Transfer. And it makes sense to think of a model of public finance for long-term care as more akin to a retirement benefit than to health insurance,” she writes.

She notes that the government spends more on providing healthcare for those over 65 than the rest of us – and that living past 80 carries with it “a 30 per cent chance of requiring long-term institutional or home care.” That risk currently carries a cost that might be addressed via “a steady, pension-like benefit stream,” she explains.

She proposes “a long-term care insurance (LTCI) benefit… (that) could be attached to the CPP/QPP as a supplementary benefit. It would pay out a capped cash transfer to the beneficiary, set according to the level of health need as assessed through existing provincial mechanisms. Unlike the CPP/QPP, the benefit would be assignable to a qualifying third-party provider of institutional or home care, as chosen by beneficiaries in consultation with their local assessing agency.”

Such a benefit, she concludes, already exists in countries like “Germany, the Netherlands, and Japan.” She calls the proposal a creative way “to bring the full advantages of our federal system to the pressing issues of long-term care.”

Long-term care is something we all hope we’ll never need, but could be part of our retirement expenses. A best defence against unexpected retirement costs is, of course, retirement saving.

And an excellent way to do that is to consider joining the Saskatchewan Pension Plan. The money you contribute is professionally invested at a very low cost, and SPP has averaged an impressive eight per cent rate of return since its inception 35 years ago. Check out SPP today.

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.


Guide aims at folks planning on retiring in 10 years or less

April 22, 2021

If you are one of the many Canadians who is a decade (or less) away from retirement, and haven’t had time to really think about it, there’s an ideal book out there for you.  The Procrastinator’s Guide to Retirement by David Trahair walks you through all the decisions you’ll need to make, and the strategies you may want to employ, to have a solid retirement – soon.

Trahair makes the point early that you need to track your current spending to have an accurate sense of how much you need to save to fund your retirement.  He says the old 70 per cent rule – that you will be comfortable if you can save up enough to live on 70 per cent of your pre-retirement income – is “problematic… it may be the right answer for one person, but totally wrong for you because your financial situation is as individual as your fingerprints.” Knowing what you spend now, and will spend when retired, is a key piece of knowledge when setting savings targets, he explains.

Through the deft use of charts, examples and worksheets, Trahair explains that most of us have “golden opportunity” years for retirement savings when we have surplus funds, thanks to paying off a car loan, or having a child graduate from university. What you do during these periods of excess money “can make or break” your retirement plans, he advises, noting that an obvious destination for some of this cash is retirement savings.

He looks in detail at whether it’s a good idea to save for retirement in a registered retirement savings plan (RRSP) or pay off debt, like credit cards or mortgages, first. Trahair says anyone with high-interest credit card debt should pay that off first before saving for retirement, because of the “rate of return” you get by eliminating the debt.

“A lack of cash outflow is as good as a cash inflow, and better if that inflow is taxed,” he explains. In other words, all the money once spent on paying down the credit card is now in your pocket instead.

Whether to pay down the mortgage versus saving for retirement is a trickier calculation (Trahair has a spreadsheet for you to make your own choice). He says the “commonsensical” approach is to make an RRSP payment and then put the refund on the mortgage. However, later in the book he warns of the dangers of not paying off the mortgage until after retirement.

“If you went into retirement with a $200,000 mortgage, you’d need $293,254.75 extra in your RRSP just to break even,” he writes. “Put another way, you’d be just as well off as someone who had a zero-mortgage balance and $293,254.74 less in their RRSP.”

There’s a lot of good stuff here. There’s a chapter on selecting an investment advisor, and good advice for those investing on their own. He warns that those saving later in life often look for higher returns, which can be risky. “Hoping for a 10 per cent rate of return to solve your problems will mean you’ll have to take extreme risk… chances are good this strategy will result in dismal failure. So, he advises, have a disciplined investment approach, and manage risks. A rule of thumb he likes is the one that suggests 100 minus your age should be the percentage of your portfolio that is in fixed income. The rest should be in the stock market.

Later, he explains how GICs are his favourite investment, especially when held in RRSPs, Registered Retirement Income Funds (RRIFs) and Tax Free Savings Accounts (TFSAs).

He examines the concept of how much you’ll spend in retirement, noting that some costs, like Canada Pension Plan (CPP) contributions, car operating costs, dining out and dry cleaning will drop once you’re no longer going to work, well-dressed.

He talks about how you can maximize both CPP and Old Age Security benefits by deferring them until later – and covers the pros and cons of doing so.

Later chapters cover the “risk” of living a long life, the “snowball” versus “avalanche” methods of debt reducing, and estate planning.

This is an excellent resource for all aspects of retirement planning, and – even better – it is written for a Canadian audience.

If your retirement plan includes the Saskatchewan Pension Plan, you’re already getting professional investing help at a low fee of just 0.83 per cent in 2020. SPP manages investment risks for you – and has chalked up an impressive rate of return of 8 per cent since its inception 35 years ago. Why not to check out SPP today!

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.