Retiring after the age of 65 is a handy fix for not saving enough to retire comfortably.
But if you look at where today’s retirees are getting their income from, employment is mostly a non-factor. Those who do work past 65 tend to be very well-off men.
The basics of retirement income are clear – most people will have some level of income from the Canada Pension Plan, Old Age Security, personal investments and a mix of pensions and registered retirement savings, and a few will have employment income.
Answers to this question are found in data from a social-policy consultancy called Open Policy Ontario. Summed up, the numbers highlight the importance of personal retirement saving and call into question the idea of backstopping your savings by working in retirement.
Open Policy analysts Richard Maaranen and John Stapleton looked at income composition for people aged 65 and over broken down into deciles, or 10 equal groups, according to pretax median total income. The first four deciles have median incomes of $12,500 to $24,800. CPP, OAS and the Guaranteed Income Supplement provide most of their income for this group, while employment income is almost non-existent.
Personal savings through company pensions, RRSPs and RRIFs become progressively more important as incomes rise. In the ninth decile, people with median incomes of $66,700, these savings generate 49 per cent of total income. CPP and OAS account for 25 per cent, while employment income is at 13 per cent. The remainder of their income comes mainly from investments.
A column last week looked at a study showing that more than half of people approaching retirement will have to make lifestyle changes because they aren’t saving enough for retirement. The Open Policy numbers support this finding by documenting the importance of personal savings in rounding out CPP and OAS, and raising questions about contributions from working.
The complication here is that it has never been harder to save for retirement. Inflation and high interest rates have reduced the amount of money many households have available to save. Also, the cost of parenting has expanded in a way that limits saving potential. Just as they should be power-saving for retirement, some parents are diverting money to adult kids trying to get into the housing market.
Working past the age of 65 is an obvious solution for people who cannot save as much as they ideally should. But the Open Policy numbers lead to a surprising conclusion about people working in retirement: For the most part, they’re not generating much income.
Employment earnings account for 3 per cent to 9 per cent of the pie for middle earners 65 and up, which means people making $29,000 to $42,900. The richest seniors, those in the 10th decile with a median income of $99,900, get 26 per cent of their income from employment. Men aged 65 and up in the 10th decile got 33 per cent of their income from employment, compared with just 14 per cent for women in the same demographic.
Mr. Stapleton said lack of employment earnings for lower-income seniors can be explained by the clawback of GIS benefits above a certain income, while the lower level of employment income for women can be explained in part by the fact they make less in comparison with men.
In all deciles, men had higher median incomes than women. Example: The median income for the most well-off men 65 and up is $117,800, compared with $83,200 for women.
Something else that stands out among the most well-off seniors is the role of investments outside their pensions and registered retirement plans. The Open Policy numbers show that 27 per cent of income for men and women in the 10th decile comes from investments and other market income, including alimony.
Looking at where seniors get their income suggests taking a personalized, modular approach to retirement savings. Your base is CPP and OAS. On top of that, to the best of your abilities, you add blocks for personal retirement savings, including pensions if you’re fortunate enough to have one. The next level is non-registered investments and other assets.
The more you save on your own, the more latitude you have in retirement for setting a lifestyle. Working longer can help cover for lower savings, but the Open Policy analysis suggests it’s not generating a lot of income for most of today’s retirees. This will very likely change for retirees of the future.
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Rob Carrick