Live long and prosper… hopefully

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This article was published 24/09/2022 (1167 days ago), so information in it may no longer be current.

We’re slipping.

Apparently, retiring in Canada isn’t as great as we might think.

Of course, many already realize the challenges today from high inflation to having to make complex financial decisions without the foundation of a workplace pension.

But the latest rendition of an annual survey by a large mutual fund company Natixis Investment Managers, ranking retirement around the world, offers more evidence, revealing that Canada has fallen out of the top 10.

We’re now ranked 15th, ahead of the U.S. at 18th spot, but behind Norway, Switzerland, Iceland, Ireland and Austria — all ranking in the top five.

The drop in status, however, is not the most important finding of the Natixis Global Retirement Index report. Rather, what is are the findings of a survey, including the report, of Canadian financial advisers, citing the biggest retirement mistakes people often make.

Top among those are underestimating how long we’ll live; misjudging inflation’s impact; not factoring in extra health-care costs; a poor grasp of how retirement income sources fit together; and being too conservative with our investments.

Of course, these are all connected, says Dave Goodsell, executive director Natixis Centre for Investor Insight, which puts together the report published annually for the last decade.

“We also asked this question to investors (surveyed) on how they feel about this statement: ‘It’s increasingly my responsibility to fund retirement on my own.’”

Among Canadians, 83 per cent agreed, five percentage points higher than the global average, he adds.

For individuals staring down retirement, or currently retired, successfully navigating the financial challenges is intimidating.

“For one, your assets could be down in double-digit percentages,” Goodsell says. “So you’re starting to take money out from a smaller pool while things cost more.”

Plus, you’re managing uncertainties like longevity risk — outliving your savings — and future market returns, which present another risk: an unfortunate sequence of returns.

“It really does matter when you start taking distributions,” Goodsell says.

“It can make a huge difference in your outcomes.”

Consider this example of $400,000 invested in the S&P 500 in 2000 for 20 years, drawing $32,000 a year. Based on historical returns, you would run out of money by 2010.

Yet if those same annual returns are randomized, one potential iteration shows an individual still having $300,000 by 2020.

In short, there are many unknowns involving random fortune/misfortune that may result in wildly different outcomes.

Of course, no retiree is going to have all their assets invested in the S&P 500 from which to draw their retirement income. But the exercise illustrates how one decision early in retirement can have an outsized impact two decades later, says Bonnie-Jeanne MacDonald, director of financial security research at the National Institute on Ageing at Toronto Metropolitan University.

“You only get one run at this,” she says about retiring.

“If people are worried about life expectancy, inflation and managing their assets to deal with these, the answer to all three of these is to get more secure, low-cost pension access.”

Of course, fewer workers have access to defined-benefit pension plans through their workplace, she notes, though every worker does have access to the Canada Pension Plan (CPP) which is a defined benefit plan itself.

And if longevity and cost of care to age in place — favoured by many Canadians — is important, securing as much reliable income from a low-cost, professionally managed pool of capital — as CPP offers — is a good move.

Yet MacDonald notes many people don’t do this, opting instead to take CPP as soon as possible.

She adds taking CPP earlier is perfectly OK if it’s necessary.

But if it’s not, “the typical Canadian will lose out on $100,000 (in payments) by taking their CPP at age 60 compared with deferring to age 70.”

Additional steady income shouldn’t be overlooked for its potential to have a positive impact in late age.

“The biggest complexity is care,” MacDonald says, adding the oldest boomers are now entering their 80s when these needs increase.

It’s a large group and growing that will cost government coffers an estimated $71 billion in 2050 compared with $22 billion today.

“That will account for one-fifth of all provincial and federal personal income tax revenue,” she says.

In short, it’s likely elder care will only become more costly for Canadians, and the more guaranteed sources of income individuals have to pay for these costs, the better, MacDonald adds.

Sure, good fortune helps, but fortune often favours the prepared, Goodsell notes.

In turn, individuals making big retirement decisions are best served seeking professional help to develop a sustainable plan for the long term, he adds.

It’s a task Winnipeg certified financial planner Ian Wood at Capital Cardinal Management Inc. does regularly.

Occasionally, the job involves uncomfortable conversions early on — that clients’ wealth doesn’t match their retirement goals for instance.

“It’s better to have this discussion than not, though, because no one wants to hear they’re going to be OK only to find out two years into retirement they’re low on money.”

Good plans are often complex, but one good first step is to understand what you are spending today.

Then subtract costs you likely won’t have when retired, like a mortgage payment.

Wood points out many may then use a rule of thumb to replace 70 per cent working income to fund retirement, but that can be deceptive.

“People usually find other ways to spend money previously used for debt and retirement savings, for example, when they retire.”

The best advice: Plan early, revisit your plan regularly and stress-test it with worst-case scenarios, he adds.

“You want to know you have lots of wiggle room,” Wood explains.

“That way, at least, you know you’re likely going to be OK financially.”