All posts by Jonathan Chevreau

Canadians losing confidence in Retirement plans and stressed about running out of money

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Canadians have lost confidence in their ability to retire on time and debt-free, according to a new report by the Canadian Public Pension Leadership Council (CPPLC). As a result, almost half of those polled by Pollara Strategic Insights are stressed about the prospect of running out of money in Retirement, as the graphic from the report illustrates below:

You can find the full report, which runs roughly 40 pages, by clicking on its highlighted title here: The Pensions Canadians Want: Perceptions of Retirement (2016–2022).

A press release issued Monday says the report comes from a Canada-wide survey conducted in 2022 similar to an earlier survey by the CPPLC on retirement perceptions prepared in 2016.

An introduction recaps the three major pillars of the Canadian retirement income system: government-sponsored CPP/OAS/GIS; Workplace Retirement Plans and Personal Savings (primarily RRSPs/TFSAs/non-registered savings).

However, a minority of Canadians currently have access to the workplace pension plans of Pillar 2: only 39.7% as of 2021, according to Statistics Canada. Worse, Pillar 3 savings are not making up for that gap: the report cites a Bank of Montreal finding that the average RRSP account balance is $144,613. That is not enough to fund an average yearly spending level of $64,000 (2019 average) over a retirement that may last 20 or 30 years. It also finds that not everyone is using TFSAs: those who do tend to older and married, with higher incomes and education.

As you can see from the graphic on the right, those with Employer Pensions (especially classic Defined Benefit plans) experience somewhat less stress than those who do not. (Actually, I’m surprised the gap isn’t wider!).

As you might expect, given that they tend to live longer, women are more stressed than men about running out of money: a majority (53%) are stressed about running out of money once retired, compared to 41% of men.

Women also report more uncertainty about managing retirement savings themselves. And they rate the importance of maintaining standard of living higher than men, as shown in the graphic below:

Four key Observations

1.) Canadians consistently show preferences for predictable, inflation-adjusted, and lifetime
guaranteed retirement income

2.) Canadians continue to place importance on maintaining their standard of living in retirement

3.) Fewer Canadians are confident about managing their savings or that they will reach their
objectives and retire when they want

4.) Canadians are less confident they will be debt free in retirement and continue to report low
knowledge of retirement income sources

Three major recommendations

1.) Increase access to collective plans: leverage homegrown expertise to increase participation in
workplace pension plans by encouraging the growth of sector- and broader-based public sector
plans. Continue Reading…

I interview RetireEarlyLifestyle’s Billy and Akaisha Kaderli

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Billy & Akaisha in Mesa, Arizona; courtesy Kiplinger

Earlier this spring, I was interviewed by Billy and Akaisha Kaderli, the globe-trotting early retirees who run the RetireEarlyLifestyle.com website and authors of several books on Early Retirement. 

You can find that interview on both our web sites: here’s the version from the Hub: RetireEarlyLifestyle.com interview on Financial Independence & the “Findependent” lifestyle.

And here is the same interview at RetireEarlyLifestyle.com.

Turnabout is fair play so today, I play interviewer and Billy and Akaisha are on the hot seat to answer.  

 

 

Jon Chevreau: What do you think of the term FIRE [Financial Independence/Retire Early)? You made it there in your early 30s but can Millennials, Gen X and GenZ expect to replicate your success, given the high cost of housing and everything else?

Billy & Akaisha: FIRE is a great marketing acronym filled with energy and intrigue. There was no such term when we left the working world in 1991, 33 years ago. There really wasn’t even the mental concept of being “financially independent” except for perhaps well-paid athletes, actors and trust fund babies.

We called ourselves Early Retirees, but we never retired from life, just from the conventional idea of working until age 65 or when Social Security kicks in. We had other plans for ourselves like travel, volunteer work, creative projects and continuous learning. We’ve always been productive and we like that feeling of pursuing our passions.

As for whether or not Millennials, Gen X and Gen Z can expect to become financially independent, we would say yes.

It’s a matter of discipline, focus, being aware of one’s financial choices, and most definitely finding a partner who is on the same financial page.

We have explained many times in our books and on our website that the four categories of highest spending in any household are Housing, Transportation, Taxes and Food/Dining/Entertainment. Pare down your personal infrastructure or modify your cash outlay in those categories and you will find money to invest towards your future life of freedom.

So yes, we say it can still be done.

JC: How many countries have you now visited around the world and how long do you tend to stay in any one location? Related question: do you maintain a home base in the United States and how long (and which seasons?) do you stay there each year?

Billy & Akaisha Karderli in Sorrento, Italy, with Mount Vesuvius in background

Billy & Akaisha: For some reason we have never cared to count the number of countries we have visited or lived in. We travel for ourselves, not to tick off boxes or to compete with other travelers.

We have visited all throughout Europe, lived in many Asian and Pacific Rim countries, visited and lived in Canada, most of the United States, all throughout Mexico, Central America and Northern South America, and have sailed throughout the Caribbean Islands.

In the early decades of our vagabonding, we’d be gone years at a time. We made trips back to the U.S. yearly to see family for a few months at a time, but then we’d get our backpacks and world maps out again and hit the road.

We utilized Geo-arbitrage long before there was a name for that hack and found it to be one of the best financial moves we have ever made.

We do still own a manufactured home in a resort in Arizona. But while on this topic, we’d like to say that living in an Active Adult Resort Community in the U.S. has been one of the most affordable and socially satisfying options for housing we have implemented.

That being said, we have many Readers and Friends who prefer to house sit all over the world and that is their gold standard of housing choice to keep costs down.

These are two examples of modifying the category of Housing to positively affect your budget.

JC:  I believe you took Social Security early. How much do you think average would-be retirees will be depending on that source of income?

Billy & Akaisha: In our case we planned our retirement as if we would not receive Social Security. We structured our portfolio to produce our needed income on its own. Now that we receive it, between dividends and SS we do not need to touch our portfolio, thus letting it grow. Continue Reading…

Now that interest rates are higher, is it time for near-Retirees to consider partial Annuitization?

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My latest MoneySense Retired Money column looks at our own family’s experience in starting to annuitize. Click the highlighted text for the full column: Should retirees in their early 70s partly annuitize?

Apart from the fact interest rates are now closer to 5% than zero, my wife and I are approaching the time when our RRSPs must be collapsed, converted to RRIFs, or fully or partly annuitized. That of course is required by the end of the year you turn 71.

One financial blogger and financial planner was ahead of the curve on rates and annuities. A year ago, on his Boomer & Echo blog, Robb Engen made the case for annuities just as interest rates were starting to rise. See Using annuities to create your own personal pension in Retirement. “Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years,” he wrote, “But with interest rates on the rise, annuities are certainly worth another look.”

Engen’s case for annuities revolves around how they minimize longevity risk: the fear many retirees have that they’ll outlive their money. “An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.”

 Those who lack an employer-sponsored Defined Benefit pension plan and therefore have hefty RRSPs are particular candidates for annuitization. Yes, it’s true that most Canadians will have some inflation-indexed annuities in the form of the Canada Pension Plan (CPP) and Old Age Security (OAS) but some may feel comfortable transferring a bit of stock-market and interest-rate risk from their own shoulders to that of the insurance companies that offer annuities.

With respect to the interest rate rises of the past year and what it means for annuities, “I agree that the timing is ripe for those approaching retirement,” says Rona Birenbaum, founder of Toronto-based Caring for Clients, a financial planning firm that includes annuities in its recommendations.

 Birenbaum – who is working to help our own family take a partial plunge to annuitization – suggested looking first to non-registered money that could be earmarked for an annuity, as it’s very tax efficient. Alterntively, “using RRSP assets makes sense providing the lack of liquidity doesn’t constrain future needs.”

Moshe Milevsky a fan of “slow partial” annuitization

Famed finance expert Moshe Milevsky, who has authored several books on retirement and annuities – notably Pensionize Your Nest Egg, coauthored with Alexandra Macqueen — told me in an email that “I will say that I have grown to become a fan of ‘slow partial’ as opposed to ‘rapid full’ annuitization, which helps smooth out the interest rate risk and is even more valuable from a behavioral psychological perspective.” Continue Reading…

The 5 factors needed for timing your Retirement, and a 6th that shouldn’t be

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My latest MoneySense Retired Money column reprises a couple of interesting takes on the key factors in deciding one’s timing of taking on Retirement. You can read the full column by clicking on the highlighted headline here: The 5 Factors of Retirement for Canadians.

One take is from the Plutus-award winning US blogger and author Fritz Gilbert; the second a Canadian take from MyOwnAdvisor’s Mark Seed.

Gilbert started the ball rolling back in April with a blog on his The Retirement Manifesto blog, entitled The 5 most important factors in your decision to retire. Gilbert is also the author of a book on retirement: Keys to a Successful Retirement. After more than 30 years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

Then this site, as it often does with bloggers’ permissions, re-reran Gilbert’s blog late last year. It was then noticed by Mark, who was inspired to write his own version of the blog, with more of a Canadian spin and remarks on his personal perspective. It was also republished on the Hub.

So what was it that so intrigued three different financial bloggers (I’ll count this blog and the MoneySense column as evidence that three of us found it worthy of a write-up)?

Fritz Gilbert

Succinctly, here are the five factors originally identified by Gilbert:

  1. Do you have enough money?
  2. Are you mentally prepared for Retirement?
  3. Have you made a realistic spending estimate?
  4. Is your portfolio ready for withdrawals?
  5. What’s your risk tolerance?

            By now, you may be wondering about the mysterious sixth factor which in his blog Fritz says “doesn’t really matter at all.” Strangely, he adds, many people consider it to be the most important in their decision.

            Spoiler alert: if you like a bit of suspense, read Fritz’s original blog before proceeding. For those who want the quick-and-dirty reveal, if you’ve not already guessed, it’s your age. Or as Fritz wrote: “For once in your life, age has nothing to do with this decision.  Unlike driving, voting, and drinking, there are no legal constraints on when you can choose to retire.  As long as you can check the boxes on the important factors listed earlier, you can choose to retire regardless of your age.” Continue Reading…

Retired Money: Americans cashing out of employer Retirement plans could benefit from Canadian approach

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My latest MoneySense Retired Money column, which has just been published, looks at an interesting study on trends in cashing out Retirement savings when American workers leave their jobs. You can find the full column by clicking on the highlighted text here: Should you cash out your workplace pension when you leave a job?

The paper, titled Cashing Out Retirement Savings at Job Separation, is co-written by a Canadian, Yanwen Wang, associate professor at the University of British Columbia’s Sauder School of Business. The study, which is fairly technical, is also featured in a more accessible version in the Harvard Business Review. The article that ran on March 7, 2023 is titled Too many employees cash out their 401(k)s when leaving a job.

Canada and the United States differ in how retirement plans are treated on leaving jobs, so most of the column applies mainly to the United States. But there may be lessons for the US retirement system that can be drawn from the Canadian treatment.

Average American has more than a dozen jobs over a career

In the US, the average American worker will have 12.4 jobs over a career, prompting the report’s authors to write that “Employers should recognize that most people working for them will change jobs before retirement.” Unfortunately, it’s all too easy for their workers to cash out of their 401(k)s when leaving a job, instead of rolling them over and letting the money continue to grow in a tax-deferred manner.

A UBC press release issued early in April carries the alarming headline that “Americans are cashing out the retirement savings at an alarming rate.”  The study identifies a “key” problem: when they switch jobs, 41.4% of employees are cashing out of those funds — even though the U.S. Internal Revenue Service (IRS) imposes a 10% per cent penalty on anyone younger than 59.5 years old.

Here’s what Wang said via email about the implications for Canadian retirement: “Canada has some different fundamental rules around retirement savings withdrawal. It is hard or probably impossible to speak to the Canadian RRSP withdrawal based on our US-based study.”
Canadian plans have locked-in feature

In particular,  many Canadian RRSPs have a locked-in feature, Wang added: “which means that even at job changing cash withdrawals are not allowed unless the individual becomes non tax resident. The locked-in feature is a key feature not present in most US retirement savings accounts. I don’t have data but I believe the illiquidity feature substantially reduces 401(k) leakage. I think the U.S. can learn from the Canadian retirement system and consider something similar — a locked-in 401(k) on top of an emergency savings plan — to satisfy the long-term retirement needs as well as short-term liquidity emergency.”

Unlike Canada, American employees can cash out at any time whether they’re working or leaving a job: the only developed economy that does. As the article points out, “other countries require many months of unemployment and evidence of clear hardship before allowing someone to tap defined contribution retirement savings.”

 Researchers also found an interesting phenomenon whereby the more a generous employer “matches” employee contributions, the more the departing employee is tempted to cash out and spend what it regards as “house money” or “free money.” Thus, the authors write, “Right now, cashing out is the path of least resistance. People choose what is easy, not what is wise.”

The column closes with some findings from a recent H&R Block Canada survey released on April 3, 2023. It  found nearly half of Canadians are unprepared for retirement and more than a third (36%) between ages 18 and 54 believe they won’t ever retire.