The ideal perspective on saving for retirement would come from someone who:
- Doesn't sell investment products - Has seen decades' worth of trends, fads and economic cycles; - Combines common sense, plain language and sharp analysis that often challenges the conventional wisdom.
Actuary Malcolm Hamilton is exactly this person, but at age 61 he's heading into retirement later this year. What have his 32 years of experience taught him about life after leaving the workforce? Find out in this edited transcript of a conversation we had on topics ranging from whether Canadians are saving enough to the federal government's plans to change Old Age Security.
Q: There's an assumption in almost everything written about retirement that people aren't saving enough. How true is that?
A: It hasn't been true historically. During my entire working lifetime, I don't think there was ever a time where Canadians were thought to be saving enough. And yet, during my entire working lifetime, there never seems to have been a time where Canadians had trouble retiring. But past is no guarantee of the future.
Q: Looking ahead, what will the retirement savings challenge be?
A: Frankly, there are legitimate reasons for concern going forward that Canadians won't be as lucky with housing as they have been in the past, and they probably will not be as lucky with government policy. The aging population is going to constrain what governments can do. And, given where interest rates are, they're not likely to be as lucky with rates as we have been in the past.
Q: If people have done OK for themselves in retirement, why are we perpetually being warned that savings levels aren't good enough?
A: There are large numbers of people and institutions who profit if people save for retirement. I don't blame them – that's what they're supposed to do, and they're very good at it. But having said that, they never seem to succeed because they're always dissatisfied with how much people are saving.
Q: Let's talk about government's role in providing retirement income. With Ottawa planning to make changes to OAS, how worried should people be that government austerity will cut into their retirement benefits?
A: I don't think the Canada Pension Plan is something that people need to be worried about in the foreseeable future, by virtue of the fact that it's contributory and by virtue of the fact that we get triennial reports saying it's OK. With OAS, we'll see to what extent those benefits are at risk. I don't think a change is required, but the government seems inclined to do it in any event.
Q: What about public sector pension benefits. Do you see changes ahead?
A: I would think at some point there will be a reform of public sector pensions. Those plans are very expensive and the cost is, as a rule, is not fully reflected in employee compensation. So taxpayers are really paying more there than they should be. I don't know how long it's going to take before taxpayers to notice that, though.
Q: What's the best way for the average person to figure out how much he or she needs for retirement?
A: I think people should be saving what it makes sense for them to save, as long as that allows them to retire some time before the age of 70. It makes more sense for the variable to be retirement age than retirement saving. Live frugally, don't squander your money, spend as you need to on your family and yourself to have a good life, and save what you can. Then, ask yourself from time to time, at what age will I be able to afford to retire?
Q: RRSP contributions are an example of the kind of cost you don't have once you're retired. Do retirees typically spend less than working people?
A: Way less. Families have two really high expenses during their working lives that they don't have in retirement. One is paying for things that they'll acquire in their working lives like houses. The second thing is children.
Q: Where did the idea come from that retirement was a time to live an extravagant lifestyle?
A: I think back to Freedom 55, which tended to reposition retirement in people's minds. It took retirement at 65 and pushed it back to 55, but the image that went with it was living on tropical islands, not living in Canada shovelling snow. In the real world, people need to make a distinction between a maintenance standard of living, which is the standard of living you need to live comfortably each and every year from 65 through to death, and having a bunch of things that you always wanted to do but never had time to do in your working life. I think those things should be budgeted for separately.
Q: In your experience, are retirees living it up or keeping a tight lid on spending?
A: A recurring question is whether current retirees are frugal because they're the generation that remembers the Great Depression, or does this just go with being old? I think it's age, I don't think it's generational. I've looked at statistics on how much seniors spend versus how much working families spend, and once I adjusted for mortgages, taxes, saving and child support, there was virtually no difference in spending. I think baby boomers have been mischaracterized as irresponsible spendthrifts. The vast majority of them have never had enough money to be that.
Q: Will people with financial advisers be better off financially in retirement than people who don't?
A: Yes, but not for the reason that you read. Studies have been done by people who want you to jump to the conclusion that having an adviser is important if you want to be rich. I think the proper conclusion is the reverse of that. If you're an adviser, what you want to find are rich people. If you become rich, you'll have a hard time not having an adviser. In mathematical terms, this is called confusing correlation with causality.
Q: What do you think of the level of fees that people are paying for the investments in their RRSPs?
A: They're too high on average. That's fine if you're getting good advice and you've decided that your adviser's advice is so valuable and so good that you want to pay him or her a lot of money. But there are too many people who are just stumbling into investments that have fairly high fees and aren't going to have good performance net of fees, and they're not getting any good advice in the process.
Q: Let's say I'm rapidly approaching age 65 and I know I haven't saved enough for retirement. What are my best options?
A: The most powerful lever you have as you approach retirement isn't savings rate. It's retirement age. You could try to configure things so that you work part time for 10 years in retirement and earn a decent amount of money to try and cover some of the shortfall in your savings.
Q: Best choice for retirement saving – RRSPs or TFSAs?
A: For low-income people and young people, TFSAs are probably the preferred vehicle for retirement savings. The harder question is, what about people who already have $50,000 in their RRSP and they're earning $70,000 per year and they can't afford to do both, what should they do? The good news there is that it probably doesn't make much difference. And what little difference it makes, nobody is ever going to be able to figure it out.
Q: What's in your RRSP?
A: I don't have much of an RRSP because I've been in a defined benefit pension plan my whole life. I have real-return Canada bonds purchased when they were first issued in 1991 – they mature in 2021. That's about half of it. Most of the rest of is in things like real estate investment trusts. I use an ETF (exchange-traded fund) for that. I also have an ETF for U.S. high-yield bonds hedged into Canadian dollars, and some Canadian corporate bond ETFs.
Q: What will retirement look like for one of the country's foremost thinkers on retirement?
A: I'm regularly asked what my plan is, and I deliberately don't have much of a plan. I've had lots of plans in my life and it might be nice to have a period that is less planned.
Profile: Malcolm Hamilton
Title: partner at Mercer, a global consulting firm on employee benefits and pensions
Clients: A sample includes the Colleges of Applied Arts and Technology, the Ontario Teachers' Pension Plan, Hydro One, Ontario Power Generation, the Bank of Montreal and Manulife.
Retirement path: He has been working a 60 per cent workload since last April and plans to fully retire late this year.