Most canadians don’t seem to be able to answer the question of when they can retireseb_ra/Getty Images/iStockphoto
It may be the most common question facing middle-aged Canadians today: "Do I have enough to retire?"
Perhaps surprisingly, it's a question that a significant percentage of people can't answer. According to the latest BlackRock Global Investor Pulse survey, many Canadians have no idea what they have or what they need when it comes to matters of retirement.
The recently-released survey – which included 2000 Canadians aged 25-74 – found that only 42 per cent of Canadians agreed with the statement: "I understand how much I need to save for my retirement." 36 per cent said they knew what investment choices they should consider to maximize their retirement nest egg. Meanwhile, over 50 per cent of those with workplace plans said they don't know their contribution limit.
It's a lack of knowledge that has its roots in the increasing scarcity of defined benefit pension plans, says Chip Castille, managing director and chief retirement strategist with BlackRock Inc. While defined benefit plans provide retirees with rock-solid, indexed payments in retirement, most people are going to be paying for their retirement with less generous defined contribution plans or no pension plan at all.
"Companies and governments have transferred pension risk from their balance sheet to the individual's balance sheet, and that has been a massive societal change," says Mr. Castille. It's a widespread phenomenon across the developed world, as governments and employers grapple with paying for the retirement of the huge post-war baby boomer demographic.
"We're transferring this pension risk to the individual, but we are not giving them the information and the tools to understand the consequences of it and how to manage the problem," explains Mr. Castille.
"Canadians, Americans, Mexicans are all saying, `How am I supposed to retire? I don't know what I need, what should I be saving?'"
While many Canadians are worried about not having enough invested to fund their golden years, they should first spend some time to consider what it is they want out of their retirement, says Bruce Sellery, Toronto-based financial expert and author of Moolala: Why smart people do dumb things with their money (and what you can do about it).
"The easy part is the calculation," he says. "But the first part that people don't do is think about what kind of retirement they want. [Retirement] calculations are often based on an income expectation that may be disconnected from what you see for yourself in retirement."
The cost of retirement may be significantly more, or less, depending on whether you envision a life spent mostly at home gardening and doing low-cost hobbies, versus a full slate of expensive foreign vacations.
Mr. Sellery, who is married with a young child, was so unsure whether he had enough to retire that he hired a fee-only financial planner to run his family's numbers. He says enlisting the help of a professional helped him realize his finances were in better shape than he thought.
"It was the best $3,000 I have ever spent," he says.
For Canadians who are unsure of how much they need for retirement, a financial planner or adviser can make those calculations and give guidance about potential investment choices.
In Mr. Sellery's case, the planner ran through a number of retirement scenarios and then produced a retirement plan. "I think the biggest value of it was outlining the assumptions, because in 10 years or five years we can revisit the plan," he says.
Mr. Sellery observes that there are two main ways to increase your retirement nest egg: Boost your cash flow or pare back spending. ("Focus on the big things: housing, kids, cars, vacations," he says.) When it comes to investing, he suggests that investors stay away from trying to beat the market using esoteric investment vehicles and instead try to match market returns in the five per cent, per year range.
For those unwilling – or unable – to cut back their lifestyle today for a more expensive retirement tomorrow, the reality will have to include reduced expectations, says Mr. Sellery.
"You alter your expectations about retirement," he says. "If you want to retire at 65 and that is not going to happen, then you are going to retire at 70. Or, if you want to retire with the income that you have now but that is not going to happen, you're going to retire on less, perhaps substantially less."