Gordon Pape is the editor and publisher of "The Income Investor" and "The Internet Wealth Builder". His talk today is called Retirement's Harsh New Realities. He talked about the harsh realities, some solutions on how to deal with the new realities and the Ultimate Goal.
Problems
The first problem he talked about was what surveys were telling us. According to surveys, 2/3rds of Canadians plan to work after age 65. Some 38% haven't enough money to retire. Some 55% have saved less than $20,000 in the past 5 years of those who plan to retire. Some 2/3rds of boomers say they do not have enough money to retire. Some 15% say they have enough to retire. Some 56% of people surveyed said they expect to be debt free at retirement. Only 2 in 10 people have a financial plan. Also 5% count on winning a lottery to retire on.
Boomers are retiring and by 2026, 21% will be 65 plus. We are living longer and at 65 we can expect to live another 19.8 years. The aging boomers will create some financial and demographic problems. In a worry category are boomers that they have no pension plan, have moderate savings and have mortgage and other debts. In a bad category are boomers with above problems plus family that needs financial help. In an extreme category are boomers with above problems and are supporting family members.
A second problem is that Pension Plans are dying. Only 38% of employees have a Pension Plan. Some 84% of public workers have pension plans, but only 25% of private employees do. There is also a trend from Defined Benefit plans to Defined Contribution plans. Some 51% of companies are changing from DB to DC plans. The problems with DC plans start with the fact that employee are not educated investors.
A third problem is that governments cannot help. The US Pension Benefit Guaranteed Corp has a $21.6B deficit. If we expand CPP this could hit business costs hard. We do have new rules to encourage people to delay applying for CPP. This may be the first step in rising the eligible age for CPP. Rules have changed so that if you are 60 or older and working and collecting CPP, you must make CPP contributions.
A fourth problem is that we are not saving enough. In 1990, we were saving 13% of our income, but by 2010 the saving rate was 4.2%. In 1990 we had debt equal to 93% of our income, but by 2010 our debt was 150% of our income. Baby Boomers are the biggest spending generation ever. We need to save between 10% and 20% of our pre-tax income for 35 years to have enough for retirement.
The fifth problem is that we do not know what we are doing. Only 51% of us know that securities can generate income. Only 40% of us know how much we will need to retire. Some 54% of Canadians use financial advisors. (Those Canadians with financial advisors are better off.)
A sixth problem is that there is no safe place for money. We have had two stock market crashes this century. We have near record low for interest rates. Even our low inflation rate can erode the value of our cash. Stocks and ETF are vulnerable to market dictates.
A seventh problem is that the tax system works against seniors. Our current RRIF withdrawals rates erode our capital. The Dividend Tax Credit gross up exposes seniors to OAS clawback and reduction of age amount. Dividends paid to our RRSP/RRIF accounts have double taxation. Guaranteed Income Supplement is reduced by RRSP/RRIF withdrawals.
The eight and last harsh reality with retirement is that we will have to make sacrifices. Some 72% of pre-retirees are concerned about their future standard of living.
Solutions
First of all, only 21% of Canadians have a financial plan. You should do one. This involves more than pure finance. People do not realize how long they will live in retirement. Lifestyle is the key to intelligent planning. If you do not know how you want to live, you cannot cost your living expenses. You must ensure that you understand your income sources. Today people in their 70's spend only 4% less than when they were in their 40's.
The traditional target is that in retirement you need 70% of your pre-retirement income. This is inadequate. Plan on needing 95% of our pre-retirement income. You also have to deal with inflation. You can postpone applying for CPP. You can put off converting your RRSPs to RRIFs. You can keep investing.
The second solution is to pay off your debt. Some 59% of retirees are carrying debt. There is a financial risk in carrying debt into retirement, especially in carrying too much debt. Low inflation is not going to last forever. If current rates return to average interest rates that could mean a 36% increase in debt payments. Debt elimination should be a key part of your retirement plan.
The third solution is to know your pension plan. If you have a Defined Benefit plan, ask Human Resources for help. If you have a Defined Contribution plan get help on deciding which investment options to choose and constantly monitor results.
The fourth solution is to keep building your RRSP. Only 24% of Canadians claim RRSP deductions. Make sure you make yours. You can use automatic contributions. You must use realistic projects and use a pension manager mentality when making decisions on your investments. Do not assume that an RRSP is a better choice.
A fifth solution is the Tax Free Savings Account (TFSA). It is powerful and versatile savings tool. TFSA is better if income is likely to be higher in retirement. You should focus on growth securities. You can direct your RRIF payment to a TFSA.
The sixth solution is to educate yourself. Half of all adults struggle with simple math tasks. You can use apps, websites and software to help. Franklin Templeton site has calculator you can use.
The 7th solution is to minimize taxes. Maximize your RRSP contributions and TFSA contributions. Maximize medical credit. Use dividends to get dividend tax credit (DTC).
The eighth solution is to be multi-dimensional. Review your plans and revise your goals.
The Ultimate Goal
The Ultimate goal is to have a predictable income so you can have a comfortable life style. Gordon Page gave his email address if you want information on his talk at world money show. His email is gpape@rogers.com.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.
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