More Than You Have So Far

July 03, 2018 | Sam Rook


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How much will you need for your retirement?

                An unnamed investment firm (okay, it was C*BC- but we won’t talk about them) did a survey of Canadian’s preparation for retirement back in January and the results were shockingly not shocking. You can read the full article about it here by Jonathan Chevreau of the Financial Post (https://business.financialpost.com/personal-finance/the-magic-number-for-retirement-savings-is-756000-according-to-poll-of-canadians)

 

                Here is a key piece of information, buried in the middle of the article:

               

Many Canadians count on the Canada Pension Plan, Old Age Security and (for those with no other resources) the Guaranteed Income Supplement. Some will depend almost entirely on Ottawa because 30 per cent of the 1,523 adults CIBC polled online (randomly) in mid-January have saved nothing at all, while another 19 per cent have under $50,000. The ongoing decline of employer-sponsored Defined Benefit pensions makes CPP and OAS a lifeline, so it’s fortunate that younger people will benefit from a CPP that’s being gradually expanded.

 

                Nearly 50% of the surveyed people have little to no savings for their retirement. Now that is cause for concern! Those of you already in retirement know that CPP and Old Age Security (OAS) amount to about $13,000 per year. Just enough to be helpful but not enough to be anything other than a supplement to your existing savings/pension.

 

                How did we get here? Well mostly we got here because we have turned into too much of a “live for the moment” world and not enough “plan for the future” world. Defined Benefit Pensions have slowly waned as corporations have realized the liability of them acts like a weight belt when you hit stormy times in the economy. They have been replaced by RSP or Defined Contribution Pensions which put the onus on the individual to determine the proper amount to save. It is clearly not enough.

 

                Morningstar in the US published a research piece early in June that looked at various ways to help the “mass affluent” market (people with at least $100,000 in investments) meet their future retirement needs. You can read the synopsis here: (https://www.morningstar.com/blog/2018/06/11/personalized-advice.html). The answer for many people is not higher risk taking or drastic cuts to spending, rather a few simple changes could make a huge difference. Here is Morningstar’s findings summarized beautifully.

 

For example, if Americans delayed retirement until at least age 67 and contributed at least 6% in the meantime, that would boost the percent of American households having what they need from 25.6% to 71.2%. For mass-affluent households, these two actions boost retirement readiness from 45.3% to 72.9%.

 

                The same is exactly true here in Canada. It doesn’t require you to cut spending or to chase higher returns. The solution for most Canadians will be to start saving a bit more, immediately and to consider that the old “Freedom 55” idea is not going to cut it. I have met people that retired in their 50’s and they are exceptionally unique in their ability to be so austere with spending that their savings will last a lot longer than the normal person. Most of us cannot scrimp and save to that level on a day to day basis so take the easier route, put aside more into your RSP/DC Pension and think about working a year or two more. It can be the difference between comfortable retirement and a forced austerity retirement.

 

                If you are young, start planning now. Look at options available to you from your employer. RSP or DC pension plans where the company matches to some level are fantastic and you should definitely take advantage today. More importantly you should find a proper advisor that will help you with a financial plan to help you make the right decision now.

 

                You may think 3% savings is good enough for you {Narrator: It probably is NOT} to prepare for retirement but having a proper plan helps you find the right amount for you. This is critically important to understand because as we saw above, the default savings rate is not cutting it in Canada or the US. Fifty percent of Canadians definitely do not have enough for retirement. We will never get to 100% fully prepared but every 1% that are prepared is another 240,000 people that will live the comfortable retirement.