When pension plans were introduced for the first time in 19th-century Germany, average life expectancy was less than 46 years. Today, age 65 can be the threshold to 25 or 30 years of retirement.
Recent changes to the Canada Pension Plan and Old Age Security reflect this new reality and highlight the growing urgency of saving and planning for retirement, says Doug Mushka, a financial planner with the National Bank.
The CPP changes to be implemented between now and 2016 are designed to encourage people to work longer, he explains. “Basically, if you take CPP before age 65, you’ll be penalized more. If you take it after 65, you’ll get much more.”
In fact, he adds, if you wait and take CPP at 70 (which only three per cent of Canadians do currently), you’ll get double what you would have gotten at 60.
The age of eligibility for the OAS pension and the Guaranteed Income Supplement is also changing. Between 2023 and 2029, it will increase to 67 from 65.
But even for individuals who receive maximum CPP and OAS, the total is only about $1,500 per month in today’s dollars, he cautions. “It’s important to recognize that CPP and OAS won’t be an adequate primary source of income for most people, but will be a supplement to private savings and pension plans.”
A financial plan helps individuals and families ensure that they save enough to create an adequate retirement income, which lasts as long as they need it. “We break it down to a very micro level and look at where your income is currently going,” says Mr. Mushka. “Saving has to come first. You can’t leave it until the end of the month to see what’s left over, because there won’t be anything left over if it’s not the priority.”
A number of studies have shown that Canadians who work with a financial adviser develop more effective savings habits and accumulate significantly more over their lifetime, whatever their level of income. “If you can make saving part of your habits throughout your working life, it’s going to be a lot easier to retire when you want, the way you want,” he notes.
Determining the right amount to save each month starts with identifying the amount of income required in retirement, says Paul Manders, a senior vice-president and portfolio manager with the JMRD Wealth Management Team at National Bank Financial.
“A question I like to ask clients before we talk about money specifics is, ‘How will you spend your time?’” he says. “Volunteering does not require the same financial resources as travel. Spending time with the kids doesn’t necessarily cost a great deal, but if it involves buying a cottage for everybody to get together, that’s a different type of financial factor.”
To enable his clients to envision their life after work, Mr. Manders guides them in discussions through the first month in retirement, the second month, the first year and later stages. “I ask what they’d like to accomplish with their free time. That sets a framework for the money conversation,” he explains.
The “money conversation” helps to determine how much capital is needed, in addition to employment and government pension plans. That number is different for every person, Mr. Manders stresses. “I don’t think I’ve had two clients who have had exactly the same number. My parents are in their mid-70s and have never really needed anything more than their government pension plans, because of the lifestyle they’ve chosen to live, while I’ve had clients who require hundreds of thousands of dollars a year to finance their standard of living.”
That individualized approach can be a fundamental component of a successful retirement, he says. “Everyone has a different personality about money and retirement, but the popular press tends to communicate the idea that if we have certain characteristics, we should fit in a particular box.”
Such a “one size fits all” view can create tension and anxiety, adds Mr. Manders. “We customize a plan that helps to alleviate it”.