Mark Machin is president and CEO of the Canada Pension Plan Investment Board (CPPIB.) Speaking Tuesday to financial advisors attending Advocis Symposium 2017 in Toronto, he said “unlike virtually every other industrial country in the world,” Canada “has solved its national pension solvency issues.”
While you could argue that even America’s Social Security system is not solid for the next generation of American retirees, the CPP is on a solid actuarial footing. Canada’s chief actuary says CPP is sustainable over 75 years, assuming a 3.9% real [after-inflation] rate of return: CPPIB’s 10-year annualized real rate of return is 5.3%.
Despite this, many Canadians — and perhaps some of their advisors — continue to profess their belief that the CPP won’t be around for them by the time they retire. 64% believe either that CPP will be out of money by the time they retire, or don’t know whether it will be there to pay them in retirement, Machin told Advocis.
Half of retirees greatly rely on CPP
However, in practice, Canadians tend to have more faith in the CPP than they claim: 42% of working-age Canadians expect to rely on the CPP when they retire (up from just 13% 15 years ago). In 2016, more than half of Canadians who are actually receiving CPP said they rely “to a great extent” upon it.
The piece is based on a half-day conference held in Toronto on Wednesday sponsored by Franklin Templeton Investments. The third annual Retirement Innovation Summit was an equal mix of sessions on Retirement readiness and updates by Franklin Templeton executives on the current state of the markets.
The big theme was the well-established (two decades now) shift from the guaranteed-for-life Defined Benefit pensions earlier generations enjoyed, to market-variable alternatives like Defined Contribution pensions. As a result, longevity risk and market risk has been gradually shifting from the shoulders of employers to those of their workers/employees. And that in turn has meant that would-be retirees have to devote a lot more attention to the markets and investing than older generations that enjoyed what seems in retrospect to be a “golden age” of retirement income security.
Retirement is a gradual process, not a cliff
As for Retirement Readiness, one speaker described how Retirement itself has become more tentative. Instead of moving abruptly from 100% work mode to 100% leisure the moment you reach the traditional retirement age of 65, workers are experimenting with retirement and more often than not returning to the workforce, only to rinse and repeat.
Since the US financial crisis, the numbers of people aged 65 or more who are still working full-time has been on the rise. Of those still working after 65, only one in five did so because they felt they had to because of shaky personal finances. For the other four in five, it’s “because they want to or truth to tell, their spouse wants them out of the house,” the speaker said.
Furthermore, among both full- and part-time workers in that age category, 40% reported they had retired twice already: they had quit the working world, returned a few months or years later, then quit again and then returned to work again.”
Taking a Retirement Victory Lap
So much for the so-called “Retirement Cliff.” This of course is a major theme of the book I co-authored with Mike Drak: Victory Lap Retirement. We basically argue that retirement is a long process that involves slowly moving into. After all, you never see an airplane land by suddenly putting on the brakes in mid-air and dropping vertically: there is a gradual “glide path” to a smooth landing.
So it is with Retirement in our view: call it Semi-Retirement or an encore career or a legacy career but in essence it’s about moving gradually over five or ten years from 100% full-time work to perhaps 80%, 50%, 30% and so on, so that by the time you’re fully retired (perhaps in your 70s), the shock to your system is much less severe.
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Jon Chevreau
Jon Chevreau: Welcome, Tea. While many so-called robo-advisers seem to focus on young people building wealth, what about the end game? How do you handle the shift for older investors from accumulation into spending your savings in retirement?
Tea Nicola: Once a client who is accumulating assets decides that retirement is on the horizon and they let us know, we lead them into the retirement transition process. At this stage, they probably have a pretty good idea as to what they would like to spend after taxes. Their goal is to understand now if their savings and all their sources of income will be enough to fund their retirement years.
The conventional wisdom is to collect all the sources of income that the client will have and analyze it year by year. This step is essential to make sure that the goals are met. That includes the monthly cash flow for basic expenses, the annual travel budgets and one-off purchases as well as any legacies that they may desire.
We then make sure their savings can meet all those goals. If there are shortfalls, we adjust the savings rate to meet the goals by the time they want to stop working. Then, we iterate this every six months or so, both before and after the retirement date. We do this to make sure the transition is smooth and that routines are appropriately established.
Jon: You’re talking about managing expectations?
Tea: I would call it being realistic about expectations. For instance, we need to be careful about talking about a monthly income when it comes to drawing down on retirement savings.
What we typically see is an uneven drawdown, with extra spending in the first few years of retirement. The client is in a rush to do all the things they held off on while working. So, they go on world tour, get a golf membership, enjoy some fine dining, or generally treat themselves to something special. But after a few years, their spending habits ‘normalize.’ The initial exuberance declines and their expenses follow suit. You get cases like one client in her 90s, who is literally worth millions, who now has monthly expenses of about $2,000 a month.
With that in mind, our financial plans help clients to achieve the goals they want to achieve, without necessarily boxing them into a lifestyle category that doesn’t really apply for most of their retirement. This involves very realistic, practical planning that I would say goes into a bit more depth than other robo-advisers, or even many traditional wealth management firms.
Jon: Sometimes you’ll hear a kind of magic number bandied about for how much people need to retire. $1 million. $2 million … Is there a guideline that really makes sense?
Tea: It depends on the person, which is why financial planning needs to be tailored for each individual. Just like with salaries, we know that someone making $75,000 can feel like they’ve got as much money as they could possibly need. Continue Reading…
My latest MoneySense Retired Money column looks at the fate of members of the Sears Canada pension plans (DB and DC). You can find it by clicking on the highlighted headline here: What Sears retirees can do about the reduced DB pension.
While the focus is not per se on the demise of Sears Canada itself, and the loss of thousands of jobs, I refer readers to an excellent article by the Globe & Mail’s Marina Strauss (it may only be available to subscribers): Who Killed Sears Canada?
Not only will many retirees get an estimated 19% haircut on their promised pensions, but thousands of workers have lost their jobs without severance, and lost health and dental benefits. My MoneySense column reiterates that Ontario members of the Sears DB pension will be better off than Sears retirees in the other provinces, because of the Pension Benefits Guarantee Fund in Ontario, which we looked at a few columns back. Roughly half of Sears employees and retirees live outside Ontario.
Should workers take Commuted Value?
One of the questions before Sears retirees is whether to take the Commuted Value of the pension, if and when that option is offered, or to sit tight and wait for the promised pension benefits, even if they are — as expected — roughly 19% lower than they should have been. (The plan is roughly 81% funded.) Continue Reading…
Contrary to what some may feel, equities in retirement is not an oxymoron. If you’re retired or almost so, you may be thinking it’s time to lighten up on your equity exposure.
The problem with rules of thumb is that some of them get quite dated and nowhere is this more relevant than in the maxim that a retiree’s fixed income exposure should equal their age. (So, the guideline goes, 60 year olds would be 40% in stocks and 90 year olds only 10% in them).
My latest MoneySense Retired Money column looks at this in some depth, via reviews of two books that tackle both the looming North American retirement crisis and this topic of how much equity retiree portfolios should hold. You can find the full article by clicking at the highlighted text: How to Boost Your Returns in Retirement.
As the piece notes, the single biggest fear retirees face is the prospect of outliving your money. Unfortunately, retiring in this second decade of the 21st century poses challenges for just about any healthy person who lacks an inflation-indexed employer-sponsored Defined Benefit (DB) pension plan. We’re living longer and interest rates are still mired near historic lows after nine long years.
The two books surveyed are Falling Short, by Charles Ellis, and Chris Cook’sSlash Your Retirement Risk. I might add that regular Hub contributor Adrian Mastracci twigged me to the Ellis book when he compared and contrasted it to my own co-authored book, Victory Lap Retirement. See Adrian’s review here: Two notable books to guide your “Retirement” journey.Continue Reading…
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