By: Sheryl Smolkin
Read this article and comments at HRInsider.ca
As a frequent speaker at benefits conferences, and media personality, Bank of Montreal Capital Market’s Chief Economist and Executive VP and Global Economic Strategist Sherry Cooper needs little, if any, formal introduction to EBNC readers.
Cooper, who has a Ph.D. from the University of Pittsburgh, tells us in her latest book, “The New Retirement,” that boomers will redefine retirement with great energy and creativity, generally choosing to work well beyond age 65. And with the dramatic rise in their longevity, healthy, goal-driven boomers will seek purposeful leisure – focusing on regeneration, rejuvenation and low-stress contributions to society and their own personal wealth.
EBNC caught up with Cooper recently on a rare day off from her cross-country book tour, and asked her to talk about some of the issues covered in her book from the perspective of employers and other benefit plan sponsors.
EBNC: When you say in your book that boomers are “retiring” retirement, what do you mean?
Cooper: The overwhelming majority of the boomers BMO has repeatedly surveyed across the country suggest they want to continue working in retirement, which begs the meaning of the word “retirement” altogether. They will not accept personal diminishment or dependency or even stagnation for what will be an extended period of time.
Work provides so much more than just a pay-cheque. It provides a family of people of all ages you deal with on a regular basis. There is also a great deal of camaraderie and social connection associated with work. People at this stage may need a change or a sabbatical, but I think that very few healthy people age 55 -65 really need to stop altogether.
EBNC: On average, Canadians retire early, at ages 60 to 62, as opposed to working beyond retirement. Do you think these figures are misleading because people leave one job, which is characterized as retirement, but really what they are doing is going on to something else?
Cooper: The average retirement age is biased downward by public-sector workers who do retire at 55 or 56, largely because their pensions max out at that point. They leave their jobs – be it teaching or public service – and they often do other things. But they are still counted as retirees.
In contrast, we have long seen that self-employed professionals and business owners retire much later – in their late 60s or 70s. More and more of our economy is associated with independent businesses and professionals.
EBNC: Would you agree that some of us who have had a very good, very flexible education are in a better position to reinvent ourselves than those who do manual labour or some other form of physical work?
Cooper: For people in Canada with median incomes or below, between 60% and 90% of their preretirement income is covered by mandatory government pension plans. So they really don’t have to stay on the job any longer if they don’t want to.
Between CPP, OAS and GIS, individuals can get as much as $25,000/year. For a two-income family, that’s quite sufficient, given that median household income is $70,000.
It is the affluent that have to be responsible for their own savings because, even if they have DB pension plans, many are capped and the more money you make, the more you are going to need in retirement to maintain a comparable living standard.
EBNC: Let’s switch to the workplace for a moment. There is a lot of talk about formal or informal phased retirement programs to keep people at work longer, but are companies really “walking the talk” and offering flexible work arrangements?
Cooper: I think what they are doing is offering it to the people they value the most. They are not extending blanket offers because older workers are more expensive, and if you are perceived as not being very productive it’s a great way for them to cut you loose and perhaps hire someone with a lower salary.
However, I certainly know people here at the bank, even in their 70s, who are working on contract, part-time or even full-time.
Until recently, all the banks had policies that incented early retirement, so you didn’t have to give up very much to retire at age 55 if you had been working for 30 years. However, at BMO, in the last year that policy was changed.
Aside from the people that were very close to age 55, everyone else is no longer able to retire before age 65 without giving up some substantial pension dollars. So there is a real incentive here to work longer.
EBNC: Do you think more employers, particularly in the public sector, will actually bite the bullet and make early retirement provisions less generous?
Cooper: I think they have to, ultimately, because there really is a labour shortage. I also think they will have to cut back on gold-plated pension plans.
I know the Canadian Federation of Independent Business has spearheaded quite a lobbying effort, asking governments to reduce attractiveness of public-sector pensions because they just can’t compete for workers.
EBNC: Do you think phased retirement and less generous early retirement provisions will actually keep enough people at work longer to help alleviate labour shortages and make retirement more affordable?
Cooper: It’s not the answer, but it is an important contribution.
Boomers are between 42 and 62, and will not all retire at the same time anyway. For older boomers, the ability to stay on part-time, work flex-time or work at home or from the beach will certainly give their employers some breathing room.
We are also going to have to improve productivity, make immigration of skilled immigrants a lot less difficult, and probably we will have to outsource a lot more jobs.
EBNC: Your analysis of the private sector’s shift from DB to DC pension plans will be no surprise to readers of this publication. What are the implications of this shift for both employers and employees?
Cooper: People feel much less loyalty to a single employer, because a single employer is no longer taking the market risk associated with their retirement. As a result, workers don’t need to spend 30 years in one place.
It also means they are wholly responsible for their retirement savings. Employers may be matching contributions, but typically these amounts are very small and can be maxed out very easily.
For young, new employees, it may be quite a meaningful chunk of money, but once you are well into your career, the employer’s 3% contribution maxed out at a certain income level, is really quite minimal.
EBNC: You suggest that in order to have an income of $50,000/year in retirement, an individual needs to start with a lump sum of about $1 million and draw down only 4% or 5% a year. Do you think Canadians understand this?
Cooper: Some do, some don’t. Many are coming to the realization very painfully, and that’s another reason why they are going to stay on the job longer.
Of course, this is income over and above whatever private pension they might have. Many people won’t need a considerable amount of income over and above what they are entitled to.
For the affluent boomer, there is a great likelihood there will be the need for quite a sizeable nest egg, like that $1 million.
EBNC: What role can/should employers play in educating employees about financial/retirement planning?
Cooper: That’s an interesting question. I think that it is very important for employers to help their employees understand the importance of retirement saving. I know my industry is making a tremendous effort to educate the public.
EBNC: Many Canadians do not have any form of workplace pension or savings arrangement. Some experts believe that mandatory portable DC plans or a CPP-top up may be the answer to the retirement savings gap. Do you agree?
Cooper: Well again, I think it should be income-determined. Middle-income earners or below are just fine and it would be hard for someone with a reasonably low income to be forced to top up.
For those above middle income – absolutely – it’s certainly an important consideration. If people are not smart enough at those income levels to delay gratification so they can have life-long financial security, then somebody ought to force it.
EBNC: Since the subprime market crisis in August and more recent market gyrations, many Canadians may be thinking they will never be able to retire. What kind of portfolio/investments will best protect retirement savings in a DC environment?
Cooper: Well you know, ironically, I think people already retired now have to keep half of their portfolios in the stock market for their portfolio to have the type of returns that will last 20 or 30 years.
The stocks that I would choose would be stocks that are large-cap, blue-chip companies paying dividends, or companies that have experienced growth and dividend income and that have never missed a dividend payment.
EBNC: Do you have any final thoughts to share with EBNC readers?
Cooper: People often become very depressed after they stop work and come out of the initial phase of being excited because they are on vacation. Once they appreciate this is far more than a vacation, they realize they still need activities that give them a sense of accomplishment, friendships and a role in the larger community.