EMPLOYEE BENEFIT NEWS CANADA
By Sheryl Smolkin
A prominent actuary takes issue with financial planners who maintain that that everyone needs 70% of their previous income to retire successfully, and that they need to start saving at a very young age to achieve their retirement objectives. If these assumptions are indeed incorrect, employer-sponsored financial planning programs could need substantial updating.
In a keynote presentation to the International Foundation’s 38th annual Canadian Employee Benefits Conference (2005), Mercer principal and global partner Malcolm Hamilton asserted that “the key ingredient leading to a ‘gold medal’ retirement is to learn to distinguish what you want, from what others want you to want.” Hamilton presented several case studies based on actual media reports, where advice given by financial advisors was clearly not aligned with the lifestyle choices and financial realities of their clients.
Initially, he compared the finances of “Dave and Julie” both before and after retirement. Dave and Julie have three children and Dave a teacher, is the sole family breadwinner. The couple lives in a new home, of which they are understandably proud. When Dave and Julie consulted a retirement planner, they were told they are not saving enough to meet their retirement aspirations.
Dave & Julie: Pre- and post-retirement
|Working Dave||Retired Dave|
|Provision for children||(9,500)||(0)|
|*OAS, CPP and teacher’s pension|
Hamilton says, “This advice is simply not true. In fact, Dave and Julie will have almost three times more disposable income to spend on themselves after retirement. Even the poorest seniors in Ontario get government assistance from Old Age Security, the federal Guaranteed Income Supplement, the Ontario Guaranteed Annual Income System and refundable tax credits that add up to $20,900. A couple where one individual works until age 65 can collect close to $30,000 in government benefits, including Canada Pension.
Bill & Lydia: Life in the fast lane
|Provision for children||(16,000)|
In a second case study, Malcolm commented on the advice given to an Alberta couple, Bill and Lydia who have children ages 21 and 17. They have a joint family income of $160,000, a net worth of $670,600 and live in a home worth $240,000. Bill and Lydia asked if they could afford to buy a house worth $415,000 and still retire at age 60 with a $160,000 income. Their advisor told them that if they bought the house, their after tax post retirement income would only be from $70,000 to $80,000.
“When you ask the wrong question, you get the wrong answer,” says Hamilton. Bill and Lydia alone are currently living on $35,000/yr. They will be very happy with $70,000 – $80,000. They just don’t know it. And by the way, they bought the house, in spite of the poor advice they received.”
Spendthrift boomers vs. frugal seniors
|Average working age couple||Average senior couple|
|Dues and daycare||(1,000)||(0)|
|Provision for children||(9,800)||(0)|
|Available to spend||$28,100||$30,400|
SOURCE: 1997 Survey of Consumer Spending
Government statistics tell a similar story, says Malcolm. “Seniors have half the income of working age couples, yet they have a comparable amount to spend. They also don’t spend much. A typical senior with $30,400 of disposable income will save $3,700 per annum and give away $2,000 in gifts. The message is that Canadians do not need 70% income replacement to maintain a similar standard of living in retirement.
“It is not surprising that 75% of Canadians of Canadians have no retirement plan,” Malcolm adds. You can’t develop a realistic plan unless you know when you want to retire and how much you will need in retirement. Most people can’t answer these questions early in their working life. So they struggle along, raise their families, pay off the house and eventually they have enough to retire – sort of a “muddle along strategy.”
He also believes that given the choice, parents should invest in their family first and worry about retirement savings later. “The biggest mistake a Canadian can make is if faced with an expenditure that will give their children a leg up in life and putting money in an RRSP, they choose the latter. No Canadian can save enough to support their children who are 30 or 40 years old. Your children need to be financially independent and happy with their life, or you will not be happy in retirement.” S.S.