Will we all outlive our pensions? Will we even have a pension? These are a couple of scary questions that are of more than just academic interest. And they’ve been preoccupying headline writers for the past few weeks. First, the federal government floated the possibility that the eligibility-age for Old Age Security might have to be raised to 67 from 65. Even worse, many Canadians are still not taking steps to provide their own retirement funding to supplement that government pension, by contributing enough (or even anything) to registered plans like RRSPs. So what can we as individual investors do?
Pension changes coming
Forced by the realities of demographic change and stretched financial resources, many governments in Europe have already changed retirement benefits recently, so citizens have to be older before they can apply. Due to the similarly changing demographics in Canada (longer lifespans and an aging demographic are making the current system financially unsustainable in the longer term) combined with lower expected investment returns generated by the Canada Pension Plan, I would not be at all surprised if we see a move towards the age-67 threshold sooner rather than later.
What this means for you is that you have to be especially diligent regarding looking after your family. If you retire at 60 and want the maximum CPP, you must use other sources (RRSPs, employer pensions, open investments, and/or TFSAs) to fund your retirement for seven full years before the CPP kicks in. That’s a long time and a lot of money. If you decide to take the CPP earlier, you will pay a penalty by receiving less money overall for as long as you live.
If you are under 50 years of age, you have lots of time, but still need to bump up your savings to a level in the range of 10% to 15% of income. If you are over 50, all is not lost. Your mortgage should be close to being paid off and your kids may soon be out of the home. What that means is you might be able to seriously save for five to 10 years to build up your nest egg.
Do not expect some “windfall” (an inheritance, a lottery win) to save you. That is reckless behavior, and your penalty will be that you’ll be working longer, while your friends are golfing and travelling. After working 30 plus years, you shouldn’t be among the retired poor, but you need to take steps to ensure that won’t happen. Retirement (old age) sneaks up on you, so act now.
Contribute to an RRSP – now
According to Statistics Canada, the median RRSP contribution for 2010 was only $2,790. A whopping 93% of tax filers could have invested funds in an RRSP but only 26% actually did. That’s a pretty sad and depressing statistic.
I know markets have performed poorly, but that is no excuse. You could invest RRSP contributions in money market funds, guaranteed investment certificates (GICs), or other guaranteed instruments. For taxpayers in the higher tax brackets, that means a guaranteed 30% to 35% return (in the form of tax savings), even before any investment return. You won’t find a better return anywhere. As an added bonus, you get to keep all the money invested too. Yet people don’t invest. Why not?
Another favorite excuse is, “I can’t afford to contribute to an RRSP.” This is a sad excuse, because many of those same people can afford regular $6 coffees from Starbucks and $9 beers while watching the Leafs, Jets, Canucks, or Lions on the big screen at their favorite watering hole.
Not austerity, just common sense
I’m not advocating an austere, Spartan lifestyle by any means. But set up a monthly automatic investment or savings plan, no matter how modest it might seem. Make sure you strike a balance between living life now and preparing for what lies ahead, when you either stop working or are forced to quit, as many are, owing to failing health or a downsizing with their employer. The hard reality is that many people don’t get to decide on when they retire. It’s often forced on you by your employer or, increasingly, your health concerns.
Live within your means. Don’t spend more than you make on a consistent basis and put something away every month. Don’t ever touch it unless you are in really dire straits.
Do this, and do it consistently, for many years and everything will work out in the end, regardless of the financial markets’ ups and downs and whatever life might throw at you (and these are unavoidable). But consistency is the key. Like your good health, consistent good financial habits are the key to success. A proper diet, plenty of exercise, and steering clear of bad habits like smoking give you an excellent opportunity for long, healthy life. Likewise, consistent good financial habits – planning, saving, and discipline – give you an excellent opportunity for a long, financially secure retirement.
Bruce Loeppky is a financial advisor based in Surrey, B.C., and a regular contributor to the Fund Library. He can be reached at firstname.lastname@example.org.
Notes and Disclaimers
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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.