U.S. research warns of retirement’s hidden costs – housing and long-term careNovember 26, 2020
Is retirement really a gilded life at the end of a rainbow of work?
Not necessarily, says a new research paper from the National Institute on Retirement Security (NIRS) in the U.S., titled The Growing Burden of Retirement . The paper warns that unexpected costs may prove daunting when we’ve reached the after-work stage of life.
Save with SPP reached out to Tyler Bond, one of the authors of the NIRS report, to find out what else the research discovered.
“A lot of people still go into (retirement) with the `golden years’ in mind; they are going to live off their nest egg, travel, they now qualify for Medicare, and they’ll visit their grandkids,” he explains.
But near retirees should also be thinking about any debt they may be carrying into retirement, such as mortgages. “If you own your home, is it paid for?” he asks. “Do you have any health concerns that might cause you to need long-term care? For me, the most important finding of this report is for people to see there is a wide range of outcomes in retirement,” he tells Save with SPP.
As in Canada, “the lack of (retirement) savings has been a problem in the U.S. for a long time,” says Bond. “Fifty per cent of working Americans don’t have access to a retirement savings plan at work, and all the data points to the fact that people are significantly more likely to save for retirement via a plan at work.”
Bond believes “improving access to workplace retirement plans is an essential first step.”
South of the border, 12 states have taken this bull by the horns and have started their own pension plans for those without workplace pensions. These “state-facilitated retirement savings plans” are being rolled out in California, Illinois and Oregon, Bond says, and Colorado and Pennsylvania are expected to follow suit shortly.
Employers set up their employees for automatic payroll contributions, but the employers don’t contribute. The state plans feature “auto-enrolment,” meaning employees get signed up automatically with a right to opt out if they want. Other features include “auto-escalation” of contributions, Bond explains. Most plans start with a five per cent contribution which is gradually ramped up over time to eight or 10 per cent, he explains.
Another great feature liberates people from the tricky decision of choosing what to invest their money in. Most plans place the first thousand dollars in a money market fund and then switch it over to a target-dated fund.
And the plans help turn the savings into retirement income, the “decumulation” phase. “There will be help with decumulation,” Bond says. “The idea is to come up with some way to annuitize the savings,” converting the saved dollars to a lifetime income stream, he explains.
“All these automatic features make it easier for people, easier for them to save, so we are hopeful (the state plans) will adopt these features,” he explains. There has been talk of launching a national version of these “auto-IRA (individual retirement account)” plans, Bond adds.
The new plans are reminiscent of older defined benefit (DB) plans that were “dominant” in the U.S. years ago. Those plans had similar “easy” enrolment and contribution, and looked after investment and decumulation too.
“In the last 30-40 years, defined contribution (DC) plans have dominated in the private sector,” Bond explains. But these plans didn’t all feature contribution increases and don’t always help with the drawdown, retirement income stage. “Over the next decade we will probably see more innovation in the DC space,” says Bond.
Making savings easier is part of the solution, but so is understanding the retirement spending side, Bond explains. “That’s definitely part of it,” he agrees. People “don’t know how to spend their money over the course of a long retirement – the rest of their lives – and all the challenges associated with it.”
“You don’t know how long you’re going to live – 20, 25 years? More? Will you need long-term care, or will your spouse? There’s an assortment of challenges whenever you get to retirement.”
These are issues “that don’t get talked about much,” he says. “Retirement income and retirement costs are not brought together a lot.” The number of Americans carrying mortgage debt into retirement “has significantly increased” over the past decades, and those who are renting are also experiencing cost increases.
Long-term care in the U.S., as in Canada, is very costly. While some citizens qualify for lower-cost long-term care if they qualify for Medicaid (a program for people with low incomes and savings), the rest have to pay many thousands per month for care.
While long-term care insurance exists, it is expensive – mainly because those buying it tend to be those most likely to need it. One state – Washington – is looking at a “social insurance model” for long term care, a state-run program that would help citizens with long-term care costs. Citizens would contribute 58 cents on every $100 of earnings towards this program, he explains. “A social insurance model (for long-term care coverage) is the best way to go… a system where everyone pays a little bit, versus private insurance.”
We thank Tyler Bond for taking the time to speak with us.
If you don’t have a workplace pension plan – or you want to supplement the plan you have – the Saskatchewan Pension Plan may be the program for you. SPP is defined contribution plan. You can contribute up to $6,300 a year (indexed annually) towards your future pension; SPP will look after your investments and will convert your savings to income once you’ve reached retirement age. Employers are able to offer SPP as a workplace pension. Why not check SPP 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.
Even those with workplace retirement savings plan coverage still worry about retirement: Aon researchMay 30, 2019
Recent research conducted for Aon has found that Canadian workers in capital accumulation plans (CAPs), such as defined contribution (DC ) pension plans or group RRSPs, while confident about these plans and their own finances, “find it hard to save for retirement and are worried about having enough money to retire.”
The global actuarial and HR firm’s report, Global DC and Financial Wellbeing Employee Survey, also found that “fewer than half” of those surveyed have a particular goal for retirement savings, and that “depending on other sources of income, many find their current plan contribution levels are inadequate to ensure their total income needs in retirement,” according to an Aon release.
Among the other findings of the report:
- Of the 1,003 respondents, only 27 per cent saw their financial condition as poor
- Almost half of those surveyed say outstanding debts are preventing them from saving for retirement
- Two of five who are in employer-matching plans (where the employer matches the contributions made by the employee) are not taking full advantage of the match
- Of those who expect to fully retire from work, two-thirds expect to do so by age 66; 30 per cent expect to keep working forever in some capacity.
Save with SPP reached out to one of the authors of the research, Rosalind Gilbert, Associate Partner in Aon’s Vancouver office, to get a little more detail on what she made of the key findings of the research.
Do you have a sense of what people think adequate contributions would be – maybe a higher percentage of their earnings?
“I don’t believe most respondents actually know what is ‘adequate’ for them from a savings rate perspective. The responses are more reflective of their fears that that they don’t have enough saved to provide themselves a secure retirement. Some may be relating this to the results of an online modeller of some kind, or feedback from financial advisors.
“I also think that many employees don’t have a clear picture of the annual income they will be receiving from Canada Pension Plan/Old Age Security to carve that out from the income they need to produce through workplace savings. Some of this comes back to not having a retirement plan in terms of what age they might retire and, separately, what age they might start their CPP and OAS (since both of those drive the level of those benefits quite significantly).”
Is debt, for things like mortgages and credit cards, restricting savings, in that after paying off debt there is no money left for retirement savings?
“We were surprised to see the number of individuals who cited credit card debt as a barrier to saving for retirement. Some of this is the servicing (interest) cost, which is directly related to the amount of debt (and which will increase materially if interest rates do start to rise, which many are predicting).
“I think that the cost of living, primarily the cost of housing and daycare, is currently quite high for many individuals (particularly in certain areas like Vancouver), and that, combined with very high levels of student loans, means younger employees are just not able to put any additional money away for retirement. There is also a growing generation of employees who are managing child care and parent care at the same time which is further impeding retirement savings.”
We keep hearing that workplace pensions are not common, but it appears from your research that participation rates are high (when a plan is available).
“This survey only included employees who were participating in their employers’ workplace retirement savings program. So you are correct that industry stats show that overall coverage of Canadian employees by workplace savings programs is low, but our survey showed that where workplace savings programs are available, participation rates are high.”
What could be done to improve retirement savings outcomes – you mention many don’t take advantage of retirement programs and matching; any other areas for improvement?
“In Canada, DC pension plans and other CAPs are not as mature as they are in other countries such as the UK and US. That said, we are now seeing the first generation of Canadians retiring with a full career of DC (rather than DB) retirement savings. Appropriately, there has been a definite swing towards focusing on decumulation (outcomes) versus accumulation in such CAPs.
“From service providers like the insurance companies that do recordkeeping for workplace CAPs, this includes enhanced tools supporting financial literacy and retirement and financial planning. Also, many firms who provide consulting services to employers for their workplace plans encourage those employers to focus on educating members and encouraging them to use the available tools and resources.
“However, if members are required to transfer funds out of group employer programs into individual savings and income vehicles (with associated higher fees and no risk pooling) when they leave employment, they will see material erosion of their retirement savings. Variable benefit income arrangements (LIF and RRIF type plans) within registered DC plans are able to be provided in most jurisdictions in Canada, but there are still many DC plans which still do not offer these.
“It is more difficult to provide variable benefits when the base plan is a group RRSP or RRSP/deferred profit sharing plan (DPSP) combination, but the insurance company recordkeepers all offer group programs which members can transition into after retirement to facilitate variable lifetime benefits. The most recent Federal Budget was really encouraging with its announcement of legislation to support the availability of Advanced Life Deferred Annuities (ALDAs) and Variable Pay Life Annuities (VPLAs) from certain types of capital accumulation plans.
“There is still more work to be done to implement these and to ensure that they are more broadly available and affordable, but it is a definite step in the right direction. A key benefit of the VPLAs is the pooling of mortality risk while maintaining low fees and professionally managed investment options within a group plan. The cost to an individual of paying retail fees and managing investments and their own longevity risk can have a crippling impact on that member’s ultimate retirement income.”
We thank Rosalind Gilbert for taking the time to connect with us.
If you don’t have access to a workplace pension plan, or do but want to contribute more towards your retirement, the Saskatchewan Pension Plan may be of interest. It’s a voluntary pension plan. You decide how much to contribute (up to $6,200 per year), and your contributions are then invested for your retirement. When it’s time to turn savings into income, SPP offers a variety of annuity options that can turn your savings into a lifetime income stream.
|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. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22|
Is there benefit to retiring later?May 9, 2019
Would people be better off if they worked a little longer, and collected their retirement benefits a little later?
A new study from the Canadian Institute of Actuaries (CIA) called Retire Later for Greater Benefits explores this idea, and proposes a number of changes, including moving the “target eligibility age” for the Canada Pension Plan and Quebec Pension Plan to 67 from 65, while moving the earliest age for receiving these benefits from 60 to 62. As well, the CIA’s research recommends that the latest date for starting these benefits move from 70 to 75.
Old Age Security (OAS) would see its target age move to 67 from 65. For registered pension plans (RPPs), the CIA similarly recommends moving the target retirement age to 67 from 65, and the latest retirement date to 75 from 71.
Why make such changes? An infographic from the CIA notes that we are living longer – a 65-year-old man in 2016 can expect to live for 19.9 years, while a woman can expect 22.5 more years of living. This is an approximately six-year improvement versus 1966.
So we are living longer, the study notes, but face challenges, such as “continuing low interest rates, rising retirement costs, the erosion of private pensions and labour force shortages.”
Save with SPP reached out to the CIA President John Dark via email to ask a few questions about these ideas.
Is, we asked, a goal of this proposal to save the government money on benefits? Dark says no, the aim “is not about lowering costs to the government. The programs as they are currently formulated are sustainable for at least 40 to 75 years, and we believe this proposal will have minimal if any implications on the government’s costs.
“We are suggesting using the current increments available in the CPP/QPP and OAS to increase the benefits at the later age.” On the idea of government savings, Dark notes that while CPP/QPP are paid for by employers and employees, OAS is paid directly through government revenue.
Our next question was about employment – if full government pension benefits begin later, could there be an impact on employment opportunities for younger people, as older folks work longer, say until age 75?
“We’re not recommending 75 as the normal retirement age,” explains Dark. “We are recommending that over a phase-in period of about 10 years we move from a system where people think of ‘normal’ retirement age as 65 to one where 67 (with higher benefits) is the norm.
“The lifting of the end limit from 71 to 75 is at the back end; there are currently those who continue to work past normal retirement and can continue to do so even later if they choose,” he explains. “Current legislation forces retirees to start taking money out of RRSPs and RPPs at age 71 – we think this should increase to 75 to support the increasing number of Canadians who are working longer.”
As for the idea of younger workers being blocked from employment opportunities, Dark says “if we had a very static workforce this might as you suggest cause a bit of blockage for new entrants, but as we say in the paper, Canada has the opposite problem.
“Many areas are having a difficult time finding workers,” he explains, adding that “in the very near future a great many baby boomers will begin to retire. We think allowing people who want to remain in the work force can help with that.
“It’s important to remember that if you have planned retirement at 65 this proposal won’t prevent you from doing that except that OAS wouldn’t be available until 67 instead of 65 (and we expect the government would explore other options for supporting vulnerable populations who need OAS-type support at earlier ages).” Dark explains.
Would starting benefits later mean a bigger lifetime benefit, and could it help with the finnicky problem of “decumulation,” where retirement savings are turned into an income stream?
“Under our proposal,” Dark explains, “people could work just a little longer and get higher benefits for life. By itself that doesn’t make decumulation any less tricky – but perhaps a little more secure.
“For many people in defined contribution (DC) plans who have no inflation protection, longevity guarantees, or investment performance guarantees from an employer, using your own funds earlier and leaving the start of CPP and OAS to as late as possible can help provide some of the best protection against inflation for at least part of your retirement income,” he adds. And, he notes, because you waited, you will get a bigger benefit than you would have got at 65.
Finally, we asked if having a longer runway to retirement age might help Canadians save more for their golden years.
“Clearly by having a longer period of work you have more opportunity to accumulate funds, and by providing more security of retirement income it will help as well,” Dark notes. “We also know that Canadians are already starting their careers later in life – getting established in their 30s rather than their 20s, for example – and need that longer runway anyway.
“Overall, to me the most important word in the report is `nudge.’ If we can get people to think about retirement sooner and get governments to act on a number of areas that we and others have outlined we hope to improve retirement security for Canadians. This is just the start of a journey that will have lots of chapters.”
We thank John Dark, as well as Sandra Caya, CIA’s Associate Director, Communications and Public Affairs, for taking the time to speak with Save with SPP. Some additional research of the CIA’s can be found on Global News Radio, BNN Bloomberg and the Globe and Mail.
Even if the runway towards retirement age is lengthened, it’s never too early to start saving for retirement. If you don’t have a workplace pension plan, or do but want to augment it, the Saskatchewan Pension Plan may be a vehicle whose tires you should consider kicking. It’s an open DC plan with a good track record of low-cost investment success, and many options at retirement for converting your savings to a lifetime income stream.
|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. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22|
Apr 15: Best from the blogosphereApril 15, 2019
A look at the best of the Internet, from an SPP point of view
DC industry looks at automatic enrolment, waiving waiting periods
Getting people to save for retirement is never easy – even, it seems, if they have a defined contribution (DC) workplace pension plan.
A report in Benefits Canada on their recent DC Summit held in Banff, Alta., says a roomful of DC sponsors, industry officials and investment people “recently compiled a wish list for DC plans.”
On that list – auto-enrolment and mandatory contributions. As well, the sponsors discussed “the suggestion to shorten or eliminate any probation period required before new employees can join a workplace plan.”
Auto-enrolment, the article explains, has already been rolled out in the UK. The idea is that instead of letting an employee decide whether or not to join, you just automatically enroll them – if they don’t want to be in the plan, they can opt out. This “nudge” approach works, because most people, once in, don’t bother to opt out.
The other ideas are similar – mandatory contributions meaning, once you are in, you stay in, and can’t decide to stop contributing. And getting rid of waiting periods would ensure people join more quickly, allowing them to contribute more.
The author of the article, Jennifer Paterson, explains it all very well. “For my part, I’m extremely supportive of this type of legislation. I believe one of the most fundamental barriers to retirement savings is inertia, so I welcome anything the government and employers can do to ensure people automatically join a workplace plan with mandatory contribution levels, and do so as soon as possible.”
Save with SPP agrees strongly. Workplace pension plans of any sort are increasingly hard to come by in most private sector companies, so it is essential that those who can join, do. They will certainly thank themselves in the future for having done so.
Another nice trend spotted lately is the return of savings optimism, not seen for some time. A recent CNBC survey found Americans were more confident (30 per cent) or much more confident (27 per cent) about their ability to save for retirement versus three years ago.
“With the economy in its 10th year of expansion, wages creeping up and unemployment below 4 per cent, experts say being in a better place financially is a good opportunity to address your savings anxiety,” the article notes.
If you are fortunate enough to have a retirement program at work, be sure to join it if you haven’t already. And if you don’t, the Saskatchewan Pension Plan provides a way for you to create your own plan. Once you enrol, you can set your level of contributions and can choose to increase what you pay in whenever you get a raise. And SPP is a full-featured plan, in that there’s a simple way, once you retire, to turn those hard-saved dollars into income for life. Be sure to check it 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, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22|
Actuary Karen Hall: Turning DC savings into an income streamOctober 1, 2015
By Sheryl Smolkin
Today I’m interviewing actuary Karen Hall for savewithspp.com. Prior to her recent retirement, she was a vice president at the consulting firm Aon Hewitt, based in Vancouver. In addition to enjoying her retirement, she is continuing to explore cost effective and easy ways to create a steady income out of defined contribution (DC) pension savings.
Karen has 35 years of professional experience in the areas of pension actuarial consulting, flexible benefits consulting, senior management and HR leadership. She is also the author of the book, Risk Management Strategies for an Aging Workforce available on Amazon. Thanks so much for joining me today, Karen.
Q: Most Canadians in the private sector today have defined contribution pension plans. Tell me how a DC plan works.
A: Well, Sheryl, defined contribution means the contributions going in are defined or fixed. The member and her employer each contribute to the plan. The member often chooses how the money is invested from a number of investment options provided by the plan. Then, when the member comes to retire, she has a lump sum amount saved.
Q: On retirement, the conversion of DC assets into retirement income is for the most part left up to retirees. Why is that a problem?
A: If you buy an annuity you don’t get much in income for the amount you saved. The only other alternative is doing it yourself, that is, choosing investments, deciding how much to withdraw and figuring out how to make the money last for your lifetime. If you rely on advisers for any of this, you’re typically paying a substantial fee of at least 2% of your assets every year. The average person is just not equipped to make these decisions. I find it complicated enough and I’ve been living and breathing pensions for 35 years.
Q: Frequently, insurance companies or other DC or Group RRSP carriers, have group registered retirement income funds that retiring members of client group retirement plans can move their money into at retirement. Do these plans resolve some of these issues of high retail fees and poor financial literacy that you identified in our last question?
A: I don’t think they do. It would depend, of course, on the deal. But, often the fees are still quite high, near 2%, and the individual is still making all of the decisions I just mentioned.
Q: So how common are Group RRIF’s established for retirees of just one employer and what are the pros and cons of these types of arrangements?
A: Based on my experience, they aren’t that common. I can see why plan sponsor companies don’t want the ongoing administration. But I do think it would be great if the retiree could basically just stay in the plan and get the same investment options and fee deals as when they were active.
What I do see more often is where the insurance company that is the record keeper for the plan will have options for the member to transfer into their individual RRIF products, perhaps with a modest reduction in fees as compared to a retail purchase.
Q: How much clout do individual DC plan sponsors have in negotiating fees for their former members in rollover plans or single organization Group RRIF’s?
A: Well, as with everything, it depends on the size of the employer and on how much the employer wants to push for such a service. I do know of large employers who have negotiated such services.
Q: How should investment options be structured in rollover plans and single company Group RRIFs to maximize value from a DC plan in the decumulation phase?
A: In my view, the same options as when the member was active should generally be fine. The plan could add a target date type option for accounts and payments. But I think the typical choice of a range of balance funds and funds with conservative to moderate risk. You are going to live a fair number of years in retirement, so your time horizon isn’t that short.
Q: Saskatchewan and several other provinces, plus federal pension legislation, now allow payment of a variable pension from a DC plan – that means a stream of income that tries to simulate a defined benefit pension. Could you briefly explain to me how it works?
A: Well, it does depend on the plan and the legislation how they set it up, but very generally such an arrangement would allow the plan to provide payments to retirees. Like you said, it would simulate a defined benefit type of pension. There would generally be monthly payments and the amount of each payment would vary depending on plan experience.
For example, one client I know determines the amount of the monthly payment once a year. The amount is leveled for the year, so it’s paid every month at a level amount, but then it gets recalculated every January and depends on how well the fund did in the previous year. Generally – hopefully – it usually goes up or slightly or stays about the same. However, if it was a really bad year like 2008, the monthly pensions would likely be reduced.
Q: And how do they draw down funds in terms of various funds or investments the members are invested in or cash or whatever is actually sitting in the member’s account?
A: Well, in this particular one, when you retire and choose a variable pension, you have a lump sum amount and that lump sum amount gets translated into a number of units in the fund. Then, the fund pays a pension based on a dollar amount per unit, so the dollar amount per unit times the number of units you have, that’s what you get.
And what’s happening in this one is they’re insuring the mortality, so you don’t actually see your lump sum getting drawn down, you’re guaranteed to get that amount however long you live, and then the mortality is spread amongst the group.
Q: Oh, that’s really interesting. So it’s not just a matter of investments being sold and your money being distributed once a year, like if you had your own individual RRIF.
A: Right. So the plans can offer an individual RRIF and in those circumstances you’d see your money getting drawn down. But these variable pension ideas are to do with pooling the mortality risk.
Q: So to what extent have employers taken advantage of their ability to pay variable pensions to enhance the value of their DC plans to plan members in this all important decumulation phase?
A: As far as I know, not many have done so. Well, I know the one I gave in my example, but I don’t know of any other examples.
Q: And why do you think that’s the case?
A: Well, I think that it’s just new, right? CAP Guideline Number 8 says that plan sponsors should help members transition, but it’s new and sponsors are still considering their options. They are watching to see what others will do.
Q: Is there a real cost or a potential liability to employers that take on this responsibility?
A: That’s the big issue. For example, if you don’t have a big enough group, it’s hard to pool the mortality risk. The other thing is I’m not sure members are clamoring for variable pensions. Plan sponsors will pay attention when it affects active members and their appreciation of the benefit. I know there are plans that are interested in designing this and we’ll probably see how it develops in the next few years .
Q: Do you think it will be more of interest to public sector or private sector?
A: I think the public sector will have more ability to implement these and I think that union groups without a defined benefit plan might be interested.
Q: How important is effective employer communications in adding value to DC benefits for retirees in the decumulation phase?
A: Some employers are doing more to help members understand their options and prepare for retirement in the decumulation phase. For example, they provide one to three day retirement preparation seminars that can help considerably. I do still think, however, that individuals are not equipped to make many of these decisions. And you can put design features into DC plans that would help members better with the decision making.
Q: Could you give me an example of one or two of those?
A: Auto enrollment, auto escalation, and the design feature that we were just talking about — variable pensions — that would assist members with decision making in the decumulation phase would help.
Q: What role can annuity purchases play using all or part of the money in the plan members, DC account or RRIF to enhance the orderly draw down funds after retirement?
A: Annuities are expensive when the person is first retiring. However, I would definitely consider purchasing an annuity after about my mid 70’s. At that point, the insurance element becomes more interesting and significant because you don’t know if you’re going to live a few more years or a couple of more decades.
And the financial impact of living 2 or 20 years more is huge. The security that an annuity can give becomes much more worthwhile. So one strategy could be to separate your savings into two buckets: A: the amount you will need at age 80 saved via the annuity and B: the RRIF or the amount you’re going to spend between now and age 80. This is a bit easier to deal with, because the time frame’s better defined.
Q: That’s interesting. So do you have any other comments or suggestions that people are approaching retirement with a DC pensions or group/individual RRSPs to think about?
A: Well, focusing on just the DC pension is helpful, but I do think it’s also an incomplete solution. If the person has properly saved for retirement, he/she doesn’t have just one DC or Group RRSP account.
Even if they combine savings from previous employers, the spouse probably has registered savings, both spouses might have their own tax-free savings account and they probably have non-registered money too.
All these sources of income must be coordinated so the individual can meet their retirement and personal financial goal. Either the person has to educate themselves to manage on their own or they need help in finding an appropriately qualified financial adviser to assist them.
Right now in Canada, the price of such assistance is, in my view, unreasonably high. I also feel that many financial advisers do not have much experience with effective decumulation of retirement savings. Individuals have to look hard to find the right person.
Well, thank you very much. I really appreciate that you spoke to us today, Karen.
You are very welcome. It’s a pleasure, Sheryl. Thank you for asking me.
This is the edited transcript of an interview conducted by telephone in July 2015.
How will the ORPP affect Saskatchewan?September 24, 2015
By Sheryl Smolkin
At this point it is not clear how the Ontario Registered Pension Plan (ORPP) that will come into effect in 2017 will affect Saskatchewan says Katherine Strutt, General Manager of the Saskatchewan Pension Plan.
“I don’t believe the provincial government is interested in a mandatory pension plan,” she says.
The ORPP is a plan that will require employer and employee contributions to generate additional government benefits in excess of monthly Canada Pension Plan benefits. The average amount of CPP for new beneficiaries in January 2015 was $618.59/month. The maximum monthly CPP benefit in 2015 is $1,065.
Key features of the ORPP as set out in the consultation paper Ontario Retirement Pension Plan: Key Design Questions are as follows:
- The plan would be phased in beginning in 2017 with the largest employers. Contribution rates would be phased in over two years.
- Employees and employers would contribute an equal amount, capped at 1.9% each on an employee’s annual earnings up to $90,000. Earnings above $90,000 would be exempt from ORPP contributions.
- Earnings below a certain threshold would be exempted to reduce the burden on lower income workers.
- Contributions would be invested at arm’s length from the government. ORPP would pool investment and longevity risk and aim to replace 15% of an individual’s earnings.
- Participation would be mandatory, but workers who already participate in a “comparable workplace pension plan” would not be enrolled in ORPP. The government says its preferred definition of a comparable plan includes defined benefit and target benefit multi-employer pension plans.
- Additional conversations will be held on the best way to assist the self-employed.
An article on the International Foundation of Employee Benefits Plans website aptly summarizes some of the controversy that still surrounds the new program:
“The ORPP proposal has raised concerns among many plan sponsors of defined contribution (DC) plans because the government is proposing that they may not be considered comparable workplace pension plans. Many DC plan sponsors say they already provide adequate contributions. If those plans are not considered comparable, some question whether employers will continue them and/or lower their contributions in order to fund both ORPP and a DC plan.
Another concern is that mandatory contributions will reduce take-home pay and may result in the reduction of other workplace benefits. In the paper, the government said “ . . . some employers may take stock of their current approaches and make decisions about the right compensation mix going forward . . .’”
Both the federal Liberals and NDP parties have publicly supported a CPP enhancement. If either of these parties forms the newly-elected federal government in October, Ontario might opt to hold off on ORPP implementation until a similar national program can be adopted.
Are Canadians saving enough for retirement?August 27, 2015
By Sheryl Smolkin
Are Canadians saving enough for retirement? It depends who you ask.
A BMO survey conducted in early 2014 revealed that only 43% of Canadians planned to make RRSP contributions by the March 1st deadline, down from 50% the previous year. An October 2014 study from the Conference Board of Canada reports that almost four in 10 Canadians are not saving and nearly 20% of respondents said they will never retire.
Yet a 2015 study of 12,000 Canadian households conducted by consulting firm McKinsey & Co. says that four out of every five of the nation’s households are on track to maintain their standard of living in retirement. The research reveals that most of the unprepared households belong to one of two groups of middle to high-income households:
- Those who do not contribute enough to their defined contribution (DC) pension plans or group, and
- Those who do not have access to an employer-sponsored plan and have below average personal savings.
The McKinsey study suggests that since the retirement savings challenge is quite narrow, the best way to address it should be an approach targeted to these groups that is balanced and maintains the fairness of the system for all Canadian households.
And now, Malcolm Hamilton, a Senior Fellow at the C.D. Howe Institute and a former Partner with Mercer has weighed in on the issue with his commentary Do Canadians Save Too Little?
Hamilton agrees with the McKinsey research that Canadians are reasonably well-prepared for retirement. Most save more than the five percent household savings rate. Most can retire comfortably on less than the traditional 70% retirement target. Furthermore, the size of the group that appears to be “at risk” cannot be accurately determined nor can the attributes of its members be usefully described.
He notes that a couple can live comfortably after retirement despite a reduction in income of more than 30% for several reasons:
- They no longer need to save for retirement.
- They no longer contribute to CPP and EI.
- One of their largest pre-retirement expenses – supporting children – ends.
- During their working lives the couple acquires non-financial assets like the family home, cars, furniture, art and jewelry. Some can be turned into a stream of income. Some cannot. But they do not need to budget to re-acquire these items during retirement.
- Finally, any tolerable reduction in post-retirement income is amplified by a disproportionate reduction in income tax due to the progressive nature of our tax system and special tax breaks reserved for seniors.
As studies of our retirement system become more sophisticated, Hamilton thinks we should focus more on solutions for individuals who are not saving enough as opposed to a blanket approach that will impact everyone
So how can we fill the “gaps” identified by these studies?
Hamilton is not a big fan of an enhanced Canada or Quebec Pension plan. He agrees that CPP/QPP are effective ways to increase the post-retirement incomes, and to reduce the pre-retirement incomes, of all working Canadians.
However, he says they are ineffective ways to increase the post-retirement incomes of hard-to-identify minorities who are thought to be saving too little. “Their strength is their reach – they can efficiently move everyone to a common goal,” Hamilton says. “But what if there is no common goal? What if there are only individual goals dictated by personal circumstances and priorities?”
The report concludes that because gross replacement targets are unreliable measures of retirement income adequacy due to the diversity of our population, programs like the CPP/QPP can go only so far in addressing our retirement needs. They can establish a lowest common denominator – a replacement target that all Canadians should strive to equal or exceed.
“Beyond that, we need better-targeted programs – programs that are better able to recognize and address our individual needs,” Hamilton says.
How much of your savings can you tax shelter?February 12, 2015
By Sheryl Smolkin
Saving for retirement or any other important goal like a home purchase or your child’s education is not easy. But if you are able to deduct your annual contributions from taxable income and/or accumulate investment earnings tax-free, the balance in your accounts will accumulate much faster.
Most Canadians have heard about and save in at least one of the following registered accounts: Registered Retirement Savings Plans (RRSPs), pension plans, Tax Free Savings Account (TFSAs) or Registered Educational Savings Plans. But many may not be aware of exactly how much money they can contribute to these programs annually or carry forward to future years.
In 2014 you can contribute 18% of your income to a defined contribution (DC) pension plan to a maximum of $24,930. RRSP contributions are based on your previous year’s earnings (2013 earnings for 2014 contributions). As result of the one year lag, maximum RRSP contributions for 2014 are $24,270.
In order to contribute up to $2,500/year to the Saskatchewan Pension Plan (SPP), you must have RRSP contribution room. Maximum permissible defined benefit (DB) pension plan contributions are calculated per year of service, and reduce your DC plan or RRSP contribution room.
RRSP and pension plan contributions are tax deductible and the contributions accumulate tax deferred. However, you do not have to take a deduction for RRSP contributions in the year you contribute. You can wait until a later year when your earnings are higher and if you do, the tax savings will be greater.
Unused RRSP contribution room can also be carried forward to use in any future year. And you can still catch up even if you are retired. For example, if you have unused RRSP contribution room from past years and funds are available, contributing to your own or your spouse’s RRSP is allowed up until the end of the year the plan holder turns age 71. However, you cannot contribute to an RRSP for a person (yourself or your spouse) who already turned age 71 in the previous year.
Unlike DB or some DC pension plans (i.e. SPP), funds in your RRSP are not locked in. That means you can take money out at any time subject to paying taxes on the money in the year of withdrawal. But it is important to remember that once you withdraw money from your RRSP the contribution room will not be restored and you lose the benefit of future compounding on the amount of the withdrawal.
If tax-free withdrawals are made under the RRSP Home Buyers’ Plan or Lifelong Learning Plan, you will eventually be liable for taxes on the money if you do not pay back the principal over a prescribed period.
Tax-Free Savings Account
The TFSA is a flexible, registered savings account that first became available to Canadians in 2009. From 2009 to 2012 maximum annual contributions were $5,000/year. Based on indexation due to inflation, the annual contribution maximum was increased to $5,500 in 2013.
A TFSA can be used to enhance retirement savings or to accumulate money for other goals. Contributions are not tax-deductible but savings grow tax-free. If you make a withdrawal from your TFSA, the contribution room is restored in the year following the year you take money out. Unused contribution room is also carried forward.
Because withdrawals are tax free and contribution room is restored after a withdrawal, a TFSA can be an ideal place to stash your “emergency funds.” Another benefit of a TFSA is you can continue to make contributions indefinitely, unlike RRSP contributions which must end after age 71.
An additional attractive feature of a TFSA is that neither income earned within the plan nor withdrawals affect eligibility for federal income-tested government benefits and credits such as Old Age Security, the Guaranteed Income Supplement and the Canada Child Tax Benefit.
Registered Educational Savings Plan
A Registered Educational Savings Plan (RESP) is a tax-sheltered plan that can help you save for a child’s post-secondary education. Unlike an RRSP, contributions to an RESP are not tax deductible. However, investment earnings accumulate tax-free in the plan. When money is paid out of the plan it is taxable in the hands of the student, who typically will be in a lower income bracket than the parent or other contributor.
There is no limit on annual RESP contributions but there is a lifetime maximum of $50,000 per child. However, there are annual and lifetime maximums on the Canadian Education Savings Grant (CESG) available for eligible beneficiaries under the age of 18.
The federal CESG matches 20% on the first $2,500 (maximum of $500) contributed annually to an RESP. The maximum total CESG the government will give, up to age 18, is $7,200 per beneficiary. The grant proceeds are invested along with your contributions, further enhancing the benefits of tax-deferred and compound investment growth within your plan.
A $500 Canada Learning Bond (CLB) is also provided for children of families who are entitled to the National Child Benefit Supplement (net family income of $44,701 in 2015) and who are born after December 31, 2003. These children also qualify for CLB instalments of $100 per year until age 15, as long as they continue to receive the National Child Benefit Supplement. The total maximum CLB payable per child is $2,000.
CLBs are allocated to a specific child; unlike CESGs, they cannot be shared with other beneficiaries. There is no requirement to make contributions in order to qualify for the CLB.
Adding it all up
Over the years RRSP/pension savings limits have crept up and with the introduction of TFSAs in 2009, Canadians have another tax-effective way to save. RESPs are particularly attractive vehicles for educational savings as the federal government offers CESG grants and the Canada Learning Bond as further incentives for saving.
Understanding annual savings limits for all of these registered plans will help you to budget and save the maximum affordable amount every year in the most tax-effective way. Any unused savings room that can be carried forward will come in handy as your income increases or if you ever need to tax shelter a lump sum such as the proceeds of a severance package or capital gains on the sale of a property other than your principal residence.
Splitting your pension on marriage breakdownMay 15, 2014
By Sheryl Smolkin
When a family splits up, pensions accrued by one or both spouses (including the Canada Pension Plan) and the family home may be the most valuable family assets. This blog discusses the Saskatchewan rules for pension credit-splitting of non-government pensions.
If both partners live in Saskatchewan their pensions (including the balance in their Saskatchewan Pension Plan) form part of family property. The Family Property Act establishes as a general rule that each legally married spouse, common-law spouse and same-sex spouse is entitled to an equal share of their family property, subject to various exceptions, exemptions and equitable considerations set out in the legislation. For example, property acquired before the commencement of the relationship is exempt from distribution.
The court may divide the family property or may order that one spouse pay the other spouse enough money to equalize their shares. Alternatively, the spouses may make an agreement about how to divide their property. The agreement will be binding if it is in writing and each spouse has received independent legal advice. If a member has named the soon to be former spouse as a beneficiary, that person will continue to be the beneficiary unless the member files a change with the plan.
Under the Saskatchewan Pension Benefits Act, pensions can be divided in a number of ways:1
- If the member of a defined benefit (DB) pension plan is not yet receiving a pension and is not eligible for an unreduced benefit, the other spouse can have a lump sum transferred from the plan to a locked-in retirement vehicle like a locked-in registered retirement savings plan or another registered pension plan. The lump sum is calculated by assuming the member terminates membership in the pension plan. This calculation typically results in a very low value for the pension (ignoring possible early retirement benefits, future increases, etc.).2
- If the member of a DB pension plan is not yet receiving a pension and is eligible for an unreduced benefit, the non-member spouse can either take an immediate lump sum transfer (see 1 above) or he/she can defer the division and the non-member can also receive a pension when the member retires.
- If the plan member spouse is receiving benefits from a DB plan or an annuity from the SPP, the non-member spouse will receive his/her portion of the pension payment directly from the administrator. By default this pension is only paid in accordance with the form of pension elected by the member at retirement (i.e. life only, joint and survivor benefit) and therefore may not continue after the member’s death. However, the plan has the option of converting the spouse’s share to a pension payable on his/her life (not all plans offer this option). In addition, the plan may offer the non-member spouse the option to take his/her portion as a lump sum.
- RRSPs (both locked-in and not locked-in) and defined contribution (DC) pension plans (including the Saskatchewan Pension Plan) do not need to be valued on marriage breakdown.
This is because, unlike with a DB plan, RRSPs and DC pensions are simply tax-deferred investment accounts and so the value at any point in time is equal to the account balance. For this reason, a valuation is not necessary to determine the pre-tax value for these assets.
However, in many cases, a proper income tax adjustment should be calculated. For more details on the reason for the income tax adjustment, see the question ‘Does the value of a pension have to be adjusted to reflect income tax?’ pension valuation frequently asked questions on the BCH Actuarial Services Inc. website.
Locked-in DC plan balances are subject to the same transfer restrictions as lump sum transfers from a DB plan described in 1 and 2 above.
During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:
- You are living apart when property and assets are settled; and
- You have a written separation agreement or a court order.
Note that federally regulated pension plans (i.e. banks, airlines, rail) may not divide the pension in the same manner as mentioned above and may only allow the division options available under the federal Pension Benefits Standards Act.
Under the federal Pension Benefits Standards Act, up to 100% of the benefits earned during the relationship can be assigned to the spouse. If a portion of the member’s pension benefits are assigned to the spouse, the non-member spouse is deemed to have been a member of the pension plan and have terminated their membership in the plan.
Most federal pension plans have established administrative policies as to how the non-member spouse can receive their share of the pension, however, typically they will have the choice of an immediate lump sum transfer or a deferred pension in the plan if the member is not retired and they will receive a pension from the plan if the member is retired (the plan may offer a lump sum option and they may convert the spouse’s pension to one payable for their lifetime). For more information, click here.
Federal government pensions are divided in accordance with Pension Benefits Division Act which only allows an immediate lump sum transfer from the pension plan to the non-member spouse. For more information, click here.
1. This blog is based in part on information provided on the website of BCH Actuarial Services Inc. and the material is reprinted with permission. In all cases of marriage breakdown you should consult with a family lawyer and/or an independent actuary who will advise you regarding the laws and actuarial valuations that apply to your situation.
2. A division of a pension on marriage breakdown must not reduce the member’s commuted value to less than 50% of the member’s commuted value prior to the division.