As the leading edge of the baby boom approaches retirement they are confronting a big challenge – there has seldom been a worse time to live off savings.
More than 60 per cent of Canadians have no company-based pension plan and with interest rates at rock bottom, the payoff on safe government bonds may not be enough to even keep up with inflation.
That means it may take $1-million in investments to generate the same retirement income today as $500,000 would have generated five years ago, analysts say.
Canadians instinctively know they are headed for choppy waters. Independent polls reveal a common theme of growing anxiety, with more Canadians expecting to delay retirement, believing they will need to lower their standard of living and a majority fearing they will one day run out of money.
Susan Eng of CARP, the advocacy group for Canadian seniors, says the problem is that boomers have simply not saved enough, and many that did saw their nest egg devastated in the 2008-09 economic storm.
On top of that, the post-recession landscape of high risk, volatile markets, and low-yield investment expectations is not a good time to do catch-up.
“We get calls when things go bad,” said Ms. Eng. And there’s plenty of examples of things going bad, she added.
These include seniors with unreasonable expectations of the lifestyle they can expect in retirement, trusting their finances to unqualified advisers, or retirees hit by bills they had not expected, such as the high cost of chronic care or residential care.
“A full 25 per cent of people in the middle income group, not the poor but those in the $50,000 to $80,000 income group, will have a dramatic drop in their standard of living on retirement,” she says.
That’s why experts say it’s never too early to start saving for the post-work years. But there are also some steps Canadians can take to help themselves today if they are five or 10 years away from calling it quits, they add.
As simplistic as it sounds, the first course of action should be to sit down with a trusted adviser and make a detailed plan of needs and means. Experts say many, if not most, people still don’t take this elementary step until it is too late.
The plan need not require advance mathematics but it should calculate your annual living costs, and for how many years, measured against your investable assets and the reasonable rate of yields, while making allowances for surprises – unexpected medical costs, high inflation, or a stock market shock.
That will tell you the life you can afford, rather than life you want.
“The low growth environment is changing a lot of financial plans,” says Steve Shepherd, vice president of equities with the Bank of Montreal.
“People have to accept that they are going to need to save more, work longer or perhaps re-evaluate their expectations for retirement.”
Adrian Mastracci, a portfolio manager with KCM Wealth Management, says someone with a house or other fixed asset who intends to downsize should consider doing so when real estate prices are still elevated. This also gives more time for realized profit to be invested.
The question is what to invest in given today’s economic backdrop.
Mr. Mastracci favours a conservative strategy for those close to retirement, although he says that should include a healthy mix of blue-chip equities and even a small dose of riskier “high octane” stocks.
He also suggests a mix of savings vehicles, from RRSPs which must be transferred to registered income funds at 71, to tax-free accounts, to non-registered vehicles, with a mind to flexibility and how the different pools are taxed.
Mr. Shepherd takes a slightly different approach. Given that yields of the most common form of investment for retirees – government bonds – are barely keeping up with inflation, he says Canadians need to rethink what is a safe investment.
Dividend-paying blue-chip equities can yield twice the rate, he points out. And even high-yield bonds, sometimes referred to as junk bonds, shouldn’t be dismissed out of hand.
“What’s risky about a portfolio of bonds from companies that have healthier balance sheets than they’ve had in a couple of decades, when you are earning six or seven per cent with a projected default rate of only two per cent?” he asks.
Whatever the strategy, Mr. Mastracci says the plan must guard against drawing down too aggressively on savings so it doesn’t run out too early.
According to Statistics Canada, someone retiring at 65 should expect to live another 20 years, and thousands will make it to their 100th birthday.
That’s a lot of time to live off savings, and retirees must also calculate that inflation is eroding assets with each passing year.
“The question is how much can I safely remove from that portfolio every year. Anything over three per cent in today’s conditions starts to nickel and dime you and you wind up taking out too much for the amount to time you will live,” Mr. Mastracci says.
Mr. Shepherd agrees on the approach. “The last thing as a financial professional I personally ever want to have to tell somebody that’s made it through 85 years is that they are out of money.”
The one advantage of the low growth environment is the expectation that inflation is likely to also be tame. As well, most retirees will have some secure income through Canada Pension Plan and possibly Old Age Security as well, if they have modest means.
But Ms. Eng said the government should do more to help individuals entering retirement years. Her key suggestion is for an expansion of the CPP to lift the maximum benefit from $12,000 annually to about $16,000.
Still, the best advice is to put your own money away, said Mr. Mastracci, and the sooner the better.