Investing during times of world turmoil – what strategies are out there?

There’s no question – amid wars around the globe and a tricky trade war here at home – that we are living in unusual times.

What, if anything, should investors be doing during this latest bout of world turmoil? Save with SPP took a look around to see what strategies commentators are suggesting to ride out the storm.

Writing in The Globe and Mail Gordon Pape suggests taking “part profits,” or selling off some of your holdings.

“I don’t like selling in times of adversity. In fact, most financial experts suggest the opposite course: buy when prices are weak. But we’ve enjoyed strong stock markets in recent years, and you may hold securities that have more than doubled in value, even after last week’s pullback. Taking some of that money off the table and holding it in reserve in case the situation further deteriorates isn’t a bad idea,” he suggests, adding that you should first “check out tax consequences” and not “overdo it.”

He suggests we “check out commodities. Wars are bad news for stocks and bonds. But they can lift commodity prices, as we’ve seen with oil and gas.”

Keep an eye out for “special situations,” or companies that are doing well because of the crisis, such as energy stocks (due to impacts on oil shipping). He adds that we should consider holding some gold, as the precious metal can be a hedge against inflation and is considered a “safe haven” investment. He concludes by suggesting we all keep a bit more money in the U.S dollar, as it is “holding up well so far. Part of your cash holdings should be in greenbacks.”

He suggests things “will get better, so keep your cool and take advantage of situations as they arise.”

Writing in the Financial Post, Peter Hodson of 5i Research suggests one strategy is to be contrarian, and “buy the fear.”

“When investors panic we will often start buying. It has proven to be a good strategy, since every market downturn has ended at some point,” he continues. Sectors like energy may do quite well in these times, he adds.

“Oil of course is always a strategic asset during times of war. In the current conflict, the threat of the Strait of Hormuz closing has resulted in a big spike in oil prices. The energy sector was already doing well before this war started but has picked up steam since then,” he writes.

Gold, he concludes, “can be a good place to hide out when worried about global events, financial crises, or wars.”

An article from MoneySense from three years ago makes some still-valid points.

Alan Small writes that there is often “not a lot” investors can do when faced with a time of crisis.

“When markets sell off for reasons that are more temporary than related to economics and performance, it’s important to take emotion out of decision-making and not go into panic mode about your investments,” he writes. “Markets may dip, but they don’t usually collapse. It’s possible your portfolio’s value may drop for a period of time. In the past, after a crisis has ended—and regardless of the outcome—the markets have regained stability, and investment returns have bounced back.”

“My best advice in the face of a world crisis: Stay calm, take a deep breath and focus on the fundamentals,” he advises.

Before adopting any new investment strategy it is a very prudent idea to talk to your financial adviser. If you don’t have a financial adviser, now might be a very good time to get one and leverage their experiences with managing through things like the Tech Wreck, the World Financial Crisis and the COVID-19 Pandemic.

If you’re not experienced with managing money, but want to save for retirement, the Saskatchewan Pension Plan might be a valuable saving partner. SPP is open to any Canadian who has registered retirement savings plan room.

You can contribute any amount you choose to the plan (up to your annual RRSP limit) and can transfer in any amount from other RRSPs you might hold. Once SPP has received your savings dollars, our job is to grow them via investment in our professionally managed, low-cost pooled fund.

At retirement, your job is to receive your grown savings as income, with options including the security of a lifetime monthly annuity payment or the more flexible Variable Benefit.

Check out SPP today!

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“Yawning pension gap” seen as a retirement security threat: report

Writing for the Financial Post, Pamela Heaven cites multiple sources of research that show there’s a growing gap between Canadians with pensions, and those without.

She notes that while Canada ranks reasonably well on the Global Pension Index, a “glaring weakness… is the vast number of Canadians without a workplace retirement plan, especially in the private sector.”

According to the C.D. Howe Institute, she continues, there are more than nine million Canadians without a workplace plan, “which research has shown is key to retirement security.” Those numbers are even higher when you count the estimated 2.7 self-employed Canadians, she adds, again citing research from the Institute.

She notes there is a pronounced difference in pension coverage between the private and public sectors.

“Just 37 per cent of private sector employees are covered by some sort of retirement benefit, while 87 per cent of public sector workers are members of a registered pension plan,” she explains, citing research from C.D. Howe. The Institute also notes that private sector employers mostly offer defined contribution (DC) plans, while public sector employers still offer defined benefit (DB) plans.

What’s the difference?

According to Investopedia, “employer-sponsored retirement plans are divided into two major categories: defined benefit plans and defined contribution plans. As the names imply, a (DB) plan—also commonly known as a traditional pension plan—provides a specified payment amount in retirement. A (DC) plan allows employees to contribute and invest in funds and other securities over time to save for retirement.” The income from a DC plan depends on how well the funds have been invested at the time of retirement.

“`Even assuming the broadest definition of private-sector pension coverage, it still means that a very large number of Canadians are not covered by a workplace retirement plan of any kind’,” state the report’s authors, Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the Rotman School of Management and Common Wealth CEO Alex Mazer,” in the Post article.

Heaven’s article notes that here in Canada, “only about 19 per cent of small and medium-sized businesses with five to 499 employees in Canada provide a pension plan, compared to about 50 percent of American firms of similar size.” These figures come from recent research from the Healthcare of Ontario Pension Plan, the article adds.

Can anything be done to boost the availability of workplace pensions?

“Australia, the United Kingdom, and most recently Quebec require employers to enrol their employees in a workplace pension plan, and one day more jurisdictions in Canada may follow suit, said the report. But right now with the economic environment in such a challenging spot, forcing the benefit would be a hard sell,” Heaven writes.

One idea from the Ambachtsheer and Mazer is a “carrot” approach involving tax credits to help offset the costs of setting up a plan and making employer contributions.

“The Small Employer Retirement Plan Tax Credit would include credits for the expenses of setting up the plan and to cover 50 per cent of employer contributions for workers earning $50,000 a year, and 25 per cent for workers earning $100,000 for up to three years,” the article reports.

“At a cost to Ottawa of up to $2 billion over five years, the credit could expand coverage to another 125,000 to 500,000 Canadians and cut the cost of businesses offering a plan by nearly half,” the article adds.

This is a thought-provoking piece. Retirement income security is much easier to obtain for those with a workplace pension plan.

If your organization doesn’t offer a workplace pension plan, you might want to take a look at the Saskatchewan Pension Plan. SPP has a number of options available for employers who want to deliver a retirement plan for their teams. Full details can be found here.

SPP can scale up for large organizations and can also handle smaller ones, and SPP – and not you – handles the lion’s share of administration work. A pension can help you attract and retain employees, too.

Check out SPP today!

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Are Canadians prepared for a retirement that could last for decades?

Writing for the Financial Post, Pamela Heaven asks if Canadian early retirees are prepared for a retirement that could span four decades.

“Instead of the 20 to 30 `golden years’ of earlier generations, workers today are potentially looking at retirements that span 40 years or more,” she writes.

Life expectancy, she notes, is driving these longer retirements.

“Canadians are also living longer. Since 2023, life expectancy in Canada has risen two years to 83, and since 2001 the number of people over 100 has doubled, said the study. Globally, the number of centenarians is expected to grow by 800 per cent by 2050,” she adds.

Yet, Heaven writes, those who are retiring early today may not always have chosen this longer path.

“Almost half of the retirees in a survey by Manulife Group Retirement this week stopped working earlier than they planned at an average age of 59 — and the bulk of these early retirements were for reasons beyond their control. Either they suffered a health issue, needed to care for a loved one or lost their job,” Heaven explains.

Alarmingly, the same Manulife study found that only “15 per cent retired early because they saved enough, which raises concerns about how prepared Canadians are for an increasingly lengthy retirement,” she continues.

Let’s unpack this – more of us are going to be retired for longer than we may have expected, and most of us haven’t saved enough for our golden decades.

And, Heaven points out, this is not the best time to be trying to save for retirement.

“Financial pressures on Canadians have escalated since the pandemic. The share of working Canadians who consider their financial situation fair or poor has risen from 33 per cent in 2020 to 41 per cent today, and those who consider their retirement savings behind schedule has jumped from 35 per cent in 2021 to 48 per cent,” she reports.

So there’s been a shift away from the idea of retiring at 55 to staying on at work a little longer, the article notes.

“The share of working Canadians who want to retire later has climbed from 26 per cent in 2020 to 35 per cent today, and in Manulife’s global study, 40 to 50 per cent of workers in all markets said they planned to work in retirement,” Heaven writes.

In practice, the article warns, citing wording from the Manulife research, working after retirement isn’t as common as one might expect.

“Unfortunately, the reality in North America is that only 16 per cent of retirees surveyed work full or part time,” Heaven writes, quoting from the study. “And retirees surveyed stopped working far earlier than they’d planned, mostly due to their own health challenges or to care for a loved one,” she adds, again citing findings from the research.

Another study finding – retirement can be expensive, and you can start going through your savings faster than expected.

“Plan ahead,” warned one Gen Xer in the Manulife study, the article notes. “It’s here before you know it.”

So, if retirement savings is not currently part of your budget, you will need to add it in, even if you have to start small.

If there’s any sort of retirement program where you work, be sure to sign up and start contributing as much as you can. If not, a great option is the Saskatchewan Pension Plan, open to any Canadian with registered retirement savings plan room.

You can make annual SPP contributions at any level you like up to your RRSP limit. If you have other RRSPs that aren’t locked in, you can transfer any or all of their balances into SPP to consolidate your nest egg. You can start small and ramp up as you earn more.

SPP does the heavy lifting of investing for you, growing your hard-saved dollars in our professionally managed, low-cost pooled fund.

When work is over, your SPP income options include a monthly annuity payment you’ll receive every month for as long as you live, or the more flexible Variable Benefit.

Check out SPP today!

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Two-thirds of millennials fear running out of money in retirement: CPPIB study

About two-thirds (66 per cent) of millennials worry they’ll run out of money in retirement.

That’s one of the findings of a recent survey carried out by the Canada Pension Plan Investment Board, reported on by Serah Louis for the Financial Post.

The fear may be driven in part by a lack of retirement planning by 28- to 44-year-olds, the article notes, citing front burner worries like “a tough job market and troubles affording home ownership.”

It’s not just millennials who are worrying, the article adds, noting that the CPPIB survey found 59 per cent of all respondents had that same worry about their retirement income drying up too early.

The article quotes CPPIB’s Frank Switzer, managing director of communications, as noting that respondents in the 18-34 age bracket placed things like “career building (53 per cent) and homeownership (47 per cent) ahead of retirement savings.”

The unemployment rate, the article continues, is higher for young people than it is for the general population. While the overall unemployment rate is about 7.1 per cent, the rate for those aged 15-24 is more than double that rate at 14.7 per cent, the article adds, citing data from Statistics Canada.

That’s the highest youth unemployment rate since 2010, excluding the COVID-19 years of 2020 and 2021, the Post reports.

Switzer tells the Post that CPP is designed to replace “about a quarter of a typical wage,” and is designed to help “supplement people’s savings to cover everyday costs in retirement.”

“The average payment for a new retirement pension (at age 65) in July came to $848 a month, while the maximum came to $1,433 a month,” the article notes.

However, the article continues, you must be working to contribute to CPP. “Younger Canadians can’t start accumulating funds towards this benefit until they secure a job,” the article explains, again quoting Switzer.

Alarmingly, over half (55 per cent) of respondents said they don’t have a retirement plan, the Post reports – most said they are too focused on paying off debt and trying to earn more money to be saving for retirement.

But those surveyed believe they will need $60,000 annually in retirement income, up from $55,000 a year ago, the article explains. Switzer tells the Post that inflation “seemed to be the number one cause of people’s anxiety” about their finances.

The article makes a key point. People think they may need $60,000 a year in retirement. CPP provides a good, but modest benefit that, at best, is $1,433 per month. That’s quite a gap.

If there is a pension or retirement program at your workplace, be sure to sign up and contribute to the max. If not, the Saskatchewan Pension Plan may be the savings partner you’ve been looking for.

SPP is open to any Canadian who has registered retirement savings plan (RRSP) room. You can contribute any amount up to your RRSP limit, and can transfer in any amount from other RRSPs to consolidate your nest egg.

SPP then does the hard part for you – investing your hard-saved dollars in a low-cost, professionally managed pooled fund. At retirement, your options include a lifetime monthly SPP annuity payment, or the more flexible Variable Benefit.

Check out SPP today!

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Tidal wave of boomer retirements about to hit?

Writing in the Financial Post, Pamela Heaven warns us all to brace ourselves for the oncoming, peak wave of boomer retirements – and its impact on the economy.

“For the past 15 years since the first boomers turned 65, an estimated 5.2 million people have left the workforce. Within the next few years, 2.7 million more Canadians, now between the ages of 60 and 64, are likely to join them,” she writes.

That’s going to have a big impact on the labour market, the article continues. In the article, RBC assistant chief economist Cynthia Leach observes that the outflow of experienced workers will have a significant effect. “Canada needs to accept that, viewed from the supply side, it’s headed toward an even structurally tighter labour market within a few years,” she states in the article.

One reason why boomer retirements will have a labour force impact is that the country’s population is no longer growing at a fast clip, the article continues.

There’s been a “clampdown” on immigration, and as well, the article notes, “Statistics Canada reported that the country’s population growth hasn’t been this slow since the pandemic lockdown and RBC expects near-zero growth in 2026 and 2027 under the government’s `drastically lower targets.’”

What, the article asks, “does this mean for the economy?”

“Some industries and regions will be hit harder by labour supply pressures than others. Nine of 21 sectors have more than a quarter of employees now over 55, a share that tops the overall average of 21 per cent. In fishing and agriculture, the percentage of workers over 55 rises to 40 per cent,” Heaven writes.

“Regionally, British Columbia, Quebec and the Atlantic provinces have a higher share of older people,” she adds.

So, less workers available to fill jobs vacated by retiring boomers, and less immigration – are there other impacts from boomer retirements? Let’s read on.

“As people age annual health care costs to the state rise, from about $3,400 at age 40 to $10,000 at 70 and more than $36,000 at 90,” writes Heaven, quoting data from RBC. “So far, (RBC) estimates Canada has only seen about 11 per cent of the additional health care costs of the aging baby boomers — with the lion’s share to come.”

Heaven then explains that there will soon be fewer workers “to shoulder this burden” of rising healthcare costs. She refers to this as a “rising seniors’ dependency ratio.”

Thankfully, the article ends with talk of solutions to the problem of boomers departing the workforce.

“There are ways to bolster the workforce domestically such as training, better labour mobility and recruiting from demographic groups with lower participation rates,” Heaven writes, quoting from Leach. “But the biggest gains could be achieved by increasing productivity and capital intensity in the overall economy,” she concludes.

A route to having more independence in retirement is to have your own savings – and income from those savings. Be sure to sign up for any retirement program offered at your workplace.

If there isn’t such a program, then the Saskatchewan Pension Plan may be just the ticket for you. It’s a do-it-yourself, voluntary defined contribution program – you decide how much you want to save, or transfer in from your registered retirement savings plan. SPP does the rest, investing your precious savings loonies in a low-cost, professionally managed pooled fund.

Uniquely, SPP offers an in-plan annuity option – you can convert some or all of your savings to an annuity without having to move your money out. Another option that’s available is the more flexible Variable Benefit option.

Check out SPP today!

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62 per cent of Canadians surveyed see homeownership as a key retirement strategy: HOOPP study

More than half of Canadians recently surveyed by the Healthcare of Ontario Pension Plan (HOOPP) said they “were depending on the sale of their home to put a retirement plan in place,” reports The Financial Post.

Relying on your home to provide retirement income is a strategy that has “issues” associated with it, the Post notes.

“Sixty-two per cent of people surveyed by HOOPP said homeownership is `a key part of their retirement strategy, either as a financial investment or a source of stability in retirement,’” the article states.

“Forty-four per cent of people said they were depending on the sale of their home to put a retirement fund in place, up from 42 per cent last year and 38 per cent in 2023,” the Post article continues.

“When people are younger, they have to save for two key assets in life, one being a house and one being retirement,” states Jennifer Rook, HOOPP’s vice-president of strategy, global intelligence and advocacy, in the Post article. “As the house becomes more expensive, you are kind of forced to choose a little bit more. What we are seeing is people are really still striving for the house and putting stock in (it),” she adds.

Surprisingly, one-third of survey respondents “said they would remortgage their homes to fund their retirement — the first time HOOPP asked that question in the seven years of the survey,” the article points out.

Planning to sell your house to pay for retirement costs is a move “that is a lot less certain than it was when you embarked on that path many years prior,” Rook tells the Post.

And having a mortgage to pay down – in retirement – is seen as a possibility by 65 per cent of homeowners surveyed. “They (the 65 per cent) are worried that they will still have a mortgage by the time they are ready to retire, up from 51 per cent in 2024 and 45 per cent in 2023,” the article notes.

And while the survey found 48 per cent are “worried about being able to afford their current or future mortgage payments,” a drop from 52 per cent last year, 62 per cent of those surveyed who don’t own a home “doubt they will ever be able to purchase a home based on current interest rates.”

“The survey said younger generations are more likely to be banking on homeownership to fund their so-called golden years, with 55 per cent of those aged 18 to 34 saying they are going to rely on their home to `set them up for retirement,’ compared to half of those aged 35 to 54 and 41 per cent of those aged 55 to 64,” the article continues.

“When you’re young, you think of things differently than you do as you get a bit older,” Rook tells the Post. “But it might also speak to the availability of a pension.”

“Perhaps that’s why 88 per cent of those surveyed by HOOPP said they would be willing to contribute regular instalments to a defined-benefit pension plan, which is structured to guarantee payments for life once you stop working,” the article concludes.

It’s a great closing point. Having a pension plan through your workplace is an excellent way to provide yourself with additional retirement income, over and above the modest benefits offered by the Canada Pension Plan and Old Age Security. If you have access to a pension plan at your workplace, be sure to join up and contribute to the max.

If you don’t have a plan through your work, have a look at the Saskatchewan Pension Plan. With SPP, you decide how much to contribute each year – we do the rest. We’ll invest your pension savings in our professionally managed, low-fee pooled fund. You can join as an individual, or – if you are an employer – you can leverage SPP as your company pension plan.

At retirement, SPP members have numerous options for turning their savings into income, including a range of lifetime annuity payment options or the more flexible Variable Benefit.

Check out SPP today!

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Half of Canadian women have just $5,000 saved for retirement: HOOPP

New research from the Healthcare of Ontario Pension Plan (HOOPP) has found that nearly half of Canadian women have saved less than $5,000 for retirement, and that “most Canadians feel unprepared for retirement.”

A media release from HOOPP outlining the results of the research appeared in a recent edition of the Financial Post.

HOOPP’s 2024 Canadian Retirement Survey found that today’s retirement outlook for Canadians is “particularly bleak,” citing “a rising cost of living and persistent interest rates.”

The survey, which HOOPP carried out with Abacus Data, found that “one in five (22 per cent) have no savings at all” for retirement. “Canadian women report having less in savings and a reduced capacity to save compared to men,” the release notes. And while 49 per cent of women have less than $5,000 in retirement savings, men aren’t doing that much better – 33 per cent of them also have less than $5,000 in retirement savings, the release notes.

“We know women make less money than men and they are more likely to work part-time or take time off work to have children or look after their families,” states HOOPP’s Ivana Zanardo in the release. “Factor in rising expenses and prolonged high interest rates and it’s no surprise that their retirement security is paying the price.”

A lack of ability to save may be what’s driving the “bleak” outlook for retirement, the release continues.

A whopping 57 per cent of Canadians “feel unprepared for retirement,” the release notes – that’s 64 per cent of women and 49 per cent of men.

Women, who already have less in savings, say they “have less money coming in to save,” the release adds; in all 36 per cent of women felt this way. Nearly half of men felt the same way, the release reports.

With less money coming in, saving for retirement isn’t always seen as a top priority, the research finds.

“Affording the day to day” is seen as a top priority by 57 per cent of women and 49 per cent of men, the release states. Fifty-one per cent of men see saving for retirement as a top priority versus 46 per cent of women, but “even so, all Canadians continue to feel concerned about affording daily life (70 per cent) against a challenging economy,” the release continues.

“Over the last few years, we’ve seen Canadians struggle to keep up, first with inflation and now with interest rates and the cost of living,” states David Coletto, CEO, Abacus Data, in the release. “But a small cut in interest rates won’t provide enough relief for Canadians, who told us they expect rates to continue to impact their ability to save even if they decrease slightly in the short-term.”

Other noteworthy findings:

• One in ten (13 per cent) unretired Canadians don’t think they’ll ever retire and one in four (26 per cent) plan to continue to work in retirement in order to support themselves.
• Significantly more women feel anxious (51 per cent of women compared to 39 per cent of men), fearful (50 per cent vs. 37 per cent), frustrated (50 per cent vs. 42 per cent) and sad (46 per cent vs. 36 per cent) about their financial situation.
• Almost half (49 per cent) of unretired adults have saved nothing for retirement in the last year, as all Canadians continue to worry about having enough money in retirement (58 per cent). 
• Even as they navigate a challenging economic environment, the vast majority (70 per cent) of Canadians continue to agree they would trade some of their salary for a pension (or a better pension).

HOOPP has been pointing out the need for Canadians to have better access to retirement programs like pensions for many years. When you look at even the “maximum” benefits payable through the Canada Pension Plan, Old Age Security and even the Guaranteed Income Supplement, they are modest. You need to augment that basic income via savings from workplace retirement programs or your own personal nest egg.

If you are able to take part in a workplace pension plan, be sure you are contributing as much as you can. If you don’t have a workplace program, take a look at the Saskatchewan Pension Plan, an open defined contribution plan available to any Canadian with registered retirement savings plan room.

SPP will invest your retirement savings dollars in a low-cost, professionally managed pooled fund that has had excellent returns over the years. When it’s time to retire, your options include a lifetime monthly annuity payment, or the flexibility of SPP’s Variable Benefit.

Check out SPP today!

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Women retirees receiving 17 per cent less than men: report

We’ve all known for a while that women tend to outlive men. But a new study from Ontario’s Pay Equity Office reveals that women, on average, receive 17 per cent less income in retirement than men do.

The study was highlighted in a recent story in the Financial Post, which took a deeper dive on the issue of what it calls “the pension gap.”

Having a gap is bad, but the Post informs us that the gap between the retirement income of Canadian men and women has actually worsened over time.

“The gender pension gap was 15 per cent in 1976, but despite women’s increased labour force participation, it widened to 17 per cent in 2021, according to Statistics Canada. The average retirement income for Canadian women in that year was $36,700 and the median was $29,700,” the Post reports.

“Women receive $0.83 to every $1 a man receives in retirement income. That is a 17 per cent gendered pension gap,” Kadie Philp, commissioner and chief administrative officer of the Ontario Pay Equity Commission, states in the Post article. “This stark reality isn’t just a number — it’s a concerning trend contributing to a notable gender disparity among older Canadians, particularly women.”

And even worse, many women are not only making less than men, but are living at or below the poverty line, the newspaper notes.

“According to the report, approximately 200,000 more women than men over the age of 65 were living below Canada’s low-income threshold in 2020. Twenty-one per cent of women who had incomes below the cut-off were above the age of 75 — 51 per cent higher than the portion of their male counterparts of the same age,” the Post article tells us.

So, we may all wonder, what’s going on here – what’s causing this “pension gap?”

The fact that women take time away from employment to bear and raise children is cited as one factor for having lower retirement income, the Post states. Additionally, and perhaps for the same reason, part-time work is higher amongst women than men – 24.4 per cent of women worked part-time in 2021 compared to 13 per cent of men, the article says.

Women also get less income when off on parental leaves than men do, the Post notes.  “A majority of insured mothers in Canada (89.9 per cent) took maternity or parental leave at a reduced income level compared with 11.9 per cent of insured fathers or partners,” the Post reports.

As well, there’s the big factor of pay equity generally. Women typically make 28 per cent less throughout the year (and 11 per cent less per hour) than men. We are left to conclude that if you earn less you are no doubt also saving less for retirement.

Finally, the Post discusses “historical biases,” citing the design of Canada’s public pension system that is “designed for heterosexual couples with a male counterpart.”

The takeaway from all of this seems clear. If you are a woman, you need to focus, and never overlook, the importance of retirement saving. If there’s a pension plan where you work, make sure you are signed up and contributing to the maximum – many plans allow part-time workers to join their retirement program.

If you don’t have a program in place for work, the Saskatchewan Pension Plan may be a key resource for creating your own future retirement income. SPP, after all, was first designed to provide pension benefits to people – such as farm wives – who didn’t have access to a retirement program via employment.

SPP will take the dollars you contribute and grow them via a professionally managed, low-cost, pooled fund. When it’s time to collect, you can choose from options like a lifetime monthly annuity payment, or the more flexible Variable Benefit.

Check out SPP today!

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The trickiest retirement problem – living off a lump sum

When we work, we get paid on some sort of regular basis – we’ve been paid monthly (with an advance on the 15^th), we’ve been paid every two weeks, we’ve been paid twice a month, and we’ve been paid every week.

But in retirement, you might find that instead of regular payments, you are living off a lump sum of money – a chunk that is at its biggest near the beginning of your retirement, and that declines as you get older. What’s tricky is figuring out how much to withdraw each year.

A recent Financial Post article looks at this tricky “drawdown” or “decumulation” phase, where retirement savings are turned into income.

Author Fraser Stark, who is president of the Longevity Pension Fund at Purpose Investments,  notes that a number of “rules” have sprung up about how much you should withdraw each year, such as the “the four per cent rule, the 3.3 per cent rule, (and) the 2.26 per cent rule.” He adds that “whatever your number, these prescribed income level rules of thumb seem to point to lower – and more precise – values.”

The question for retirees to answer, he explains, is “how much can I safely withdraw from my retirement portfolio each year without the risk of running out of money?”

And while no one wants to run out of money, Stark says not taking out enough money each year is also a risk. It means you may not be living as well as you could be, he explains.

“The premise of these rules is that the opposite — not running out — constitutes success. This is where the logic behind these rules begins to fray,” he writes.

“Honing in on the `correct’ value misses the point: the entire premise of holding a basket of assets and drawing from it blindly is a suboptimal approach that often leads to inefficient outcomes for retired investors,” he explains.

The granddaddy of all withdrawal rules, the four per cent rule, was posited by Bill Bengen in 1994, writes Stark. “His analysis determined that an investor who started spending four per cent of their original portfolio value… would have not fully depleted their balanced portfolio over any 30-year period,” he explains.

The idea, Stark continues, is four per cent (on average) is a rate of withdrawal that is less than long-term rates of growth. For example, the Saskatchewan Pension Plan has averaged a rate of return of eight per cent since its inception in the late 1980s.

However, the four per cent rule assumes that the retiree is going to be able to live with a “fixed spending level” throughout his or her retirement. “It is truly set it and forget it, which is not how people behave,” he explains.

As well, he writes, people are now living longer. Mortality tables suggest that a 65-year-old woman today has a “great than 34 per cent chance of living for 35 years,” or until age 100. So you are withdrawing funds for many more years than people did in the past, Stark explains.

What, then, do you do to avoid running out of money – especially if you find yourself blowing out 100 candles on your birthday cake? The answer, says Stark, is an annuity.

“A more effective approach is to annuitize a portion of your assets at retirement, thereby creating a stream of sustainable income and withdrawing from the rest of your portfolio according to your percentage rule of choice,” he writes. You can never run out of money in an annuity, as you’ll receive it for as long as you live, he explains.

He also suggests starting Canada Pension Plan and Old Age Security later – these payments are inflation-protected and also are paid for life.

“Much has changed over those three decades. In the face of rising living costs, greater macro uncertainty and continued innovation in financial product design, an optimal outcome for many investors can be achieved by more thoughtfully constructing an initial portfolio to meet their desired outcomes, and by dynamically responding to market and life conditions as the retirement phase unfolds. We deserve no less,” he concludes.

The option of a lifetime annuity payment is available to members of the SPP. When it’s time to collect your pension, you can choose to receive some or all of your account balance as an annuity, meaning you’ll get a monthly payment for the rest of your life. If you want more flexibility around the amount you want to receive, take a look at SPP’s Variable Benefit.

SPP’s varied retirement options, coupled with its professionally managed, low-cost investment strategy, make it a reliable partner for your retirement saving and income plans.

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Despite focusing on slaying debt, Canadians still plan to retire at 60

Writing in the Financial Post, Victoria Wells reports that “more than half of Canadian investors say they’re concentrating on getting their bills paid over saving for the future.”

Yet, her article notes, despite the focus on debt reduction – brought on by higher interest rates – a CIBC study suggests “most still expect to retire around 60.”

OK, saving less, reducing debt, and still jumping over the wall of work at 60. Let’s hear more.

The focus on paying down debt, Wells reports, is “leading many to look past traditional long-term savings vehicles, such as the registered retirement savings plan (RRSP) to the Tax Free Savings Account (TFSA) instead. Indeed, 53 per cent of investors with both an RRSP and TFSA said they preferred putting their money into the latter so they could access their savings tax-free at any time. RRSPs, in contrast, may be locked-in, meaning withdrawals, which are taxable, can only be made at a future date.”

In fact, the article continues, again citing CIBC research, “one third of people with RRSPs don’t intend to make any contributions” by the annual deadline.

The fact that people seem to be preoccupied, in the present, with defeating debt seems to be impacting how they are investing generally, the article notes.

“The shift to a more conservative financial focus is also showing up in people’s investing strategies, and 42 per cent said they’re looking for predictable returns over outsized growth amid an uncertain economic environment,” the article notes.

“The preference for short-term liquidity and stable returns suggests many Canadians are focused on today and less so on long-term accumulation of wealth or retirement,” Carissa Lucreziana of CIBC states in the article.

OK, more interest on liquidity – having money available to use soon – than long-term growth. What’s driving that?

The article says anxiety may be the reason behind the switch in investment thinking.

“Inflation, higher interest rates and concerns the economy may tip into a recession have left many Canadians anxious about their finances. Worriers are spending an average of 17.7 more hours fretting about money than they were last year, according to separate research from the Bank of Nova Scotia,” the Post reports.

And some of those anxieties extend to retirement, the article adds.

Citing more data from CIBC, the Post notes that “more than half admit they either can’t afford to save for retirement or aren’t sure they’re saving enough. Another 57 per cent harbour fears they’ll run out of money in their old age, while higher inflation has forced one-third to push back their expected retirement date.”

The solution, the article concludes, is a balanced approach – focusing on debt while not overlooking long-term savings needs completely.

“Planning for both short and longer-term ambitions can help individuals move beyond their immediate needs and envision how they can live for today (and) save for the future, accumulating wealth over time to support their retirement years,” states CIBC’s Lucreziana in the article.

The article makes a great point. Of course, you should get rid of personal debt – the less you have of it in retirement, when you will probably have less income, the better. But it’s probably not a great idea to completely stop saving for retirement while battling debt. Maybe, one should consider retirement saving to be like any other bill you have to pay each month.

Members of the Saskatchewan Pension Plan can save as though they are paying bills – just set up SPP as a “bill” on your online banking, and you’re off to the races. You can also set up a “pay yourself first” pre-authorized contribution, and SPP also accepts credit card contributions. That’s one of the great features about SPP – flexibility.

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