Retirement crisis? What crisis?
Although we hear all the time that Canadians are struggling with building a nest egg, a new book is out to destroy that popular myth.
Fred Vettese, chief actuary at Morneau Shepell, and Bill Morneau, the executive chairman of the human-resources consulting company, co-wrote the just-published The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen.
Yahoo! Canada Finance chatted with Vettese to find out more.
Yahoo!: There’s a perception that Canadians are facing a retirement crisis, but the book argues otherwise. Why so?
Vettese: Most of the stories you see in the media talk about how Canadians are going to be in trouble unless we start saving a lot more and about how we’re heading toward a ticking time bomb. We’ve surveyed our own clients and two-thirds of them think we have a crisis.
Why do they think that? Because coverage through pension plans in the private sector is very low — about 22 per cent of people in the private sector in Canada [have pension plans]. Secondly, people aren’t putting as much as we’d like into RRSPs. In any given year, about 30 per cent of taxpayers are putting money into RRSPs. You take those two facts combined and people figure ‘Well, how can we possibly retire with enough income?’
But the fact is, we don’t have a problem when you look at the actual evidence. First of all, look at the poverty rate among seniors. The rate is 5.2 per cent among seniors and about 10.5 per cent among the working-age population.
Furthermore, it gets better with age. Seniors spend less and less as they get older: 85-year-olds spend less than 65-year-olds. As we say in the book, 85-year-olds save or give away as cash gifts an average of 18.6 per cent of their income every year. What does that tell you? You might think maybe they spend less because they have a lot less to spend. But they have more money to spend than they have the need for.
Yahoo!: How is it that 85-year-olds spend less than 65-year-olds?
Vettese: It’s largely because of health. Peoples in their 70s are in phase 2 of retirement. They just aren’t quite as mobile. They’re not travelling as much. If they do travel it might be down to Florida; it’s not to India or trekking in Nepal. The travel is not as exotic.
They also spend less money on durable goods. They’re not buying new furniture or sofas or upgrading the house.
Plus they might have lost a spouse, so there’s less interest in spending money. There are fewer ways to spend money by the time people reach a certain age or a certain stage of life.
Yahoo!: How does longer life expectancy fit into the equation?
Vettese: People are already concerned about outliving their assets, and longer life expectancy is exacerbating that. However, people will be spending less money than they think. You can take away most of the fear of outliving assets.
First, people can start collecting their CPP later, at age 70 instead of age 60. Hardly anyone does this in Canada. The vast majority -- 80 per cent -- start collecting at age 60 or 65. Only about 2 per cent of the population start collecting CPP at age 70. That makes a lot of sense. You end up getting more than double the benefit. And it’s totally guaranteed. You’re going to get it for life even if you live till you’re 103.
People ought to be thinking about annuitizing when they reach about age 75. Say you’re looking at a block of assets worth $100,000. At age 75, you could put the money in a RRIF and keep it in a RIFF and keep on drawing income from that or you could buy an annuity with the money.
Yahoo!: The book discusses the “fourth pillar” and how this is group of assets is largely overlooked. Can you explain what this is?
Vettese: We have more assets in the fourth pillar than first three combined — the first is OAS and GICs; the second is CPP and Quebec Pension Plan; the third pillar is RRSPs and registered pension plans. The fourth would be everything else -- things outside those tax-sheltered vehicles. Maybe it’s equity in a business; it might be a vacation property or an investment property — say, condominiums that are being rented out; it could be stocks and bonds you might have had for whatever reason; maybe it’s an inheritance; it could be the equity in your home. All of these are examples of assets in the fourth pillar. They’re invisible to some people … who keep on focusing on RRSPs or pension plans and who at the end of the year worry we don’t have enough.
Yahoo!: This all sounds very reassuring. Is it dangerous to tell people to relax about their retirement?
Vettese: We have to be careful about being complacent, but we have to be more careful about scare-mongering. I use the analogy from Aesop’s fable about the ant and the grasshopper. The ant saves all summer long and is nicely taken care of in the winter; the grasshopper doesn’t save. Canada is a country of ants instead of grasshoppers. When these stories come out, the ones who pay heed to them and who get worried tend to be the ants. They’re probably already saving enough. But they’ll think ‘That’s not enough; I better save even more.’
Of course you still have to save for retirement. It just isn’t as hard as you think it’s going to be. Your retirement income target isn’t going to be 70 per cent of your final income; it will probably be 50 per cent.
Yahoo!: What are your top tips for people wanting to be comfortable in retirement?
Vettese: Make sure you pay off your debt by time you retire. You shouldn’t have any outstanding loans at the time you retire, and that includes your mortgage.
Secondly, in the book we mention pre-retirement expenditures like your mortgage, for example. They might go away before you retire. Let’s say your children have left the house and are no longer on your payroll by time you’re 55 — you’ll be very lucky if that’s the case — and you’ve also paid off your house by the time you’re 55 and don’t retire until 60. You’ve got five glorious years with all this income and without all these expenses. People might be tempted to increase their outlay on travel and fun; maybe they’ll get a new car. Be careful during those years that your spending is sustainable and don’t get accustomed to a lifestyle you can’t afford. That’s a good time to beef up retirement savings if you haven’t been doing it before then.
** Both questions and answers in this piece are appearing in edited form.