Longevity & Aging

No doubt about it: at some point we’re neither semi-retired, findependent or fully retired. We’re out there in a retirement community or retirement home, and maybe for a few years near the end of this incarnation, some time to reflect on it all in a nursing home. Our Longevity & Aging category features our own unique blog posts, as well as blog feeds from Mark Venning’s ChangeRangers.com and other experts.

Can Dynamic Pension Pools strengthen Canadians’ Retirement Income Security?

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Image courtesy National Institute on Ageing

A new report published by the National Institute on Ageing (NIA) and the Global Risk Institute (GRI) being published today aims to help overcome the $1.5-trillion Decumulation Disconnect in the Canadian Retirement Income System.

Titled Affordable Lifetime Pension Income for a Better Tomorrow, the report makes the case for how Dynamic Pension (DP) pools can strengthen retirement income security for millions of Canadian seniors. Here is the link to the full report.

The urgency is apparent when you consider that 10 million Canadian baby boomers are now entering retirement: with longer life expectancies and a greater dependency on private savings to sustain them. As the report’s authors write, “it’s more important than ever to find solutions that will help retiring Canadians turn their accumulated savings into low-cost lifetime pension income.”

Bonnie Jeanne MacDonald/Ryerson/National Institute on Aging

Lead author Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at the NIA, says fears that retiring Canadians’ savings won’t sustain them in retirement are “legitimate …  Financial markets, inflation and health expenses are just some of the big unknowns that retirees will need to face over 10, 20, 30 or even 40 years.”

According to the report, Dynamic Pension [DP henceforth] pools have the potential to transform the Canadian retirement landscape. Their goal is simple: to help people optimize their expected lifetime retirement income while ensuring they never run out of money. In other words, gurantee that they won’t run out of money before they run out of life.

Pooling Longevity Risk

While protecting individuals from outliving their savings (i.e., longevity risk) can be prohibitively expensive, the same protection becomes affordable when spread across a large group. Pooling longevity risk allows retirees to spend their savings more confidently while they are alive, says the report.

In a DP pool, pension amounts are not guaranteed but may fluctuate from year to year. This means retirees can stay invested in capital markets and benefit from the higher expected returns.

DP pools have a risk-reward profile that is fundamentally different from current options and products available for older Canadians: such as guaranteed annuities purchased through insurance companies or individually managing and drawing down savings from personal retirement savings accounts, says another of the report’s authors, Barbara Sanders, Associate Professor at Simon Fraser University,  “Retirees who are comfortable with some investment risk can stay invested in equity markets and reap the associated rewards, which is important in today’s low-interest and high-inflation environment.” Continue Reading…

RIP Mihaly Csikszentmihalyi: author of the ground-breaking book, Flow

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Mihaly Czikszentmihalyi (YouTube.com)

Late in October, bestselling author and pyschologist Mihaly Csikszentmihalyi passed away in California at age 87. You can read the obituary in the Washington Post here.

Czikszentmihalyi — pronounced “chick-SENT-me-high” — was a university professor who built a mini empire around the nebulous concept of Flow. See this Wikipedia entry for more on his life and work.

Back in 2015, the Hub reviewed the original Flow as well as Creativity and Flow in 2016. He explored this further with Finding Flow: The Psychology of Engagement With Everyday Life.  It has the virtue of brevity when compared to the earlier two books on Flow: it runs just 180 pages, or 147 if you don’t count end matter.

Implications for Encore Careers

As noted in the earlier reviews, I’m intrigued by the concept of Flow as it applies to Encore Careers and life after corporate employment. As many blogs in the Hub’s Victory Lap section have pointed out, aging baby boomers still have a potentially long and creative period ahead of them that lies between the traditional career and what used to be called Retirement.

So it seems to me that if late-bloomer Boomerpreneurs are going to make a success of this new stage of life, they’d better tap into the concept of Flow. It’s all tied in with passion and mastery, which is why I went to the well one last time with Czikszentmihalyi.

He begins with a quotation from W.H. Auden: Continue Reading…

Retirement Planning for Baby Boomers: Getting ready to Retire comfortably

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Lowrie Financial/Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Are you a baby boomer with retirement planning on your mind? If you’re among the surge of citizens born in a large urban center like Toronto and across North America during the 20ish years after World War II, you may be noticing a different sort of booming sound lately. Can you hear it? It’s the drum beat of your retirement, fast approaching … or arrived.

Search the Internet for “Retirement Planning Toronto” and you’re likely to see a lot of fear out there, along with plenty of headline-grabbing stats on how ill-prepared many boomers are to retire. Before you let consumer-wide stats consume you, remember: Numbers don’t necessarily lie, but they can deceive.

As a personal financial advisor, I help families successfully prepare for retirement and other life transitions by emphasizing the planning part of retirement planning. Following are some of the most frequent topics of conversation I’ve found key to achieving your short- and long-term financial goals in retirement.

Family Retirement Planning: What Will It Really Cost?

If you’re like most folks getting serious about retirement planning, it may feel like a huge, angry gorilla is standing between you and your ideal lifestyle over the next 20–30+ years. One way to take on a hairy obstacle is to state the obvious about it, and consider your options from there:

Steve’s Retirement Planning Observations

Before you retire: In a perfect world, you’ve been earning an amazing income, spending well within your means, and maxing out your registered investment accounts your entire life. But let’s get real. Most of us have earned some income, avoided most debt, and accumulated some assets along the way.

After you retire: You no longer have a salary to draw on. Even if you continue to tinker part-time, any earned income is likely to be greatly reduced (and should probably be positioned to avoid unpleasant OAS clawbacks).

Time travel: No matter what you’ve accomplished so far, there’s no going back to seize any past, passed-up opportunities.

Peace of Mind Planning

So, what can we do about your personal retirement realities? Robust retirement planning helps you quantify what you’re facing and qualify how we’re going to address it. In this sense, retirement planning may be better described as peace of mind planning. At least half the battle is getting your mind wrapped around the nature of the beast, so you can make informed decisions about how to tame it.

A financial needs analysis quantifies what your retirement might look like:

Income expectations: How much can you expect to receive from which outside sources? Possibilities include government or corporate pensions and benefits, proceeds from selling your business, a spouse’s continued salary, part-time employment, etc.

Spending goals: How much do you expect to spend in retirement? Estimate numbers for early retirement, when you may still be more active and independent, as well as for once you may be slowing down and requiring more care. Organize your expenses by needs and then wants.

The gap: Usually, you’ll discover a gap between your income and spending expectations. As long as it’s a manageable amount, you’ll bridge it by taking a “salary” from your taxable and registered investment accounts. After all, that’s what they’re there for. The goal is to draw a tax-efficient income stream from your total portfolio, while leaving the rest to grow as planned for funding future needs. (Hint: A personal financial advisor can add a lot of value here.)

Balancing Spending/Earning Trade-Offs

Has your initial financial needs analysis revealed ample accumulated wealth to bridge any savings/spending gap? Congratulations, you’re retirement-ready! You may even be able to add more “wants” to your spending plans.

But what if the financial needs analysis has demonstrated that your gap is too wide to leap? We can usually help families identify a combination of trade-offs they can mix and match to shore up their retirement funding. While belt-tightening is never fun — and, alas, there is no magic money wand to wave around — these no-nonsense steps can pack a lot more power than you might think:

Working more: You may be able to transition out of the workforce more gradually than planned, seek a higher-paying position, or consider a second source of income such as consulting or participating in the gig economy.

Spending less: Can you vacation closer to home, dine out less lavishly, or downsize to more modest quarters? Maybe you wouldn’t mind selling that cottage you rarely visit, ditching that second car, or canceling a languishing membership or two. If you’ve not yet got a household budget, create one; take a month or so to watch your spending: all of it. This will help you identify excess expenses you may not even miss once they’re gone.

Digging out of debt: If you’ve been spending beyond your means, you may have accumulated high-interest debt over the years, or you may be considering doing so to bridge that widening gap. Unfortunately, this form of “bad” debt only aggravates the issue. If you’re carrying heavy debt, work with a reputable personal financial advisor or debt counselor to lighten the load.

Saving/investing more: Even as you approach or enter retirement, the more money you can direct into your investment accounts, the more leverage you’ll have over time. Depending on your time horizon, you may also be able to restructure your investment portfolio to take on more market risk in pursuit of higher expected long-term returns. Or you might consider converting a portion of your wealth into the equivalent of a personalized pension plan to reliably fund your retirement lifestyle. (An important trade-off here is you’re likely leaving less legacy for your heirs. Perhaps you could offset this by considering long-term care coverage, to minimize the chance you’ll be a financial burden as you age.)

What About Real Estate?

With today’s red-hot real estate market (especially in Toronto and other major hubs in Canada), most retirement planning ends up including a conversation about housing. So, let’s talk about that before we wrap. Continue Reading…

Some fascinating Retirement Statistics

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By Fritz Gilbert, RetirementManifesto.com

Special to the Financial Independence Hub

Call me a nerd, but I love studying retirement statistics (for the record, I prefer to consider myself curious).  When something as dramatic as COVID comes along, it really makes the numbers interesting.

If you’re curious like me, you’ll enjoy today’s post.  A compilation of some fascinating retirement statistics I recently came across, including some graphs for those of you who prefer to view the charts.

If you’re interested in how you compare to “average,” you’ll also find today’s post of interest.  Wondering what impact COVID has had on retirement confidence?  We’ve got that covered, as well.

Curiosity-seekers, unite.  This one is for you …

What’s retirement really like? What impact has COVID had? Today, a look at some fascinating retirement statistics.  

Fascinating Retirement Statistics

A while back, as I was doing some research for my post titled The Mad Retirement Rush of 2020, I came across an article with some interesting retirement statistics and saved the link into a draft post (I do that a lot, with over 100 draft posts currently holding ideas for future posts).  I wanted to do further research on retirement statistics to see how many I could compile for a dedicated post on the topic.

Today, I’m pleased to publish the resulting work and share what I’ve found during my research.  A variety of fascinating retirement statistics, dedicated to all of the fellow retirement nerds in the house.

With that, let’s dig into some numbers:

Retirement Readiness Statistics

how much people have saved for retirement

  • 51% of Baby Boomers are still paying on their mortgage in retirement, and 40% struggle to pay off their credit card debt.  (Source: Legaljobs.com)
  • 1 out of 12 Americans believes they’ll never retire at all.  (Source: Legaljobs.com)
  • 50% of retirees retired earlier than they would have liked. (Source:  TDAmeritrade Retirement Survey)

will you retire earlier than planned

  • 73% of retirees say their retirement was a “full-time stop,” with only 19% experiencing a gradual transition (e.g., fewer hours).  Among those still working, half expect a gradual transition. Related, only 30% of retirees work for money in retirement, whereas 72% of workers expect to work for some pay in retirement. (Source:  2021 EBRI Retirement Confidence Survey)
  • The average US household had $255,000 in their retirement accounts in 2019, a 5% increase from 2016 (Source: MagnifyMoney)
  • Among those with 401(k), the average balance by age is shown below: (source, Personal Capital as cited in MagnifyMoney)

what is the average 401k balance

 

COVID’s Impact on Retirement Confidence

  • While the majority of workers are still confident of their ability to retire, 34% of workers are less confident in their ability to live comfortably in retirement than they were pre-COVID.

is retirement less secure because of covid

  • COVID has caused 1 in 4 workers to adjust their expected retirement date, with 17% now planning to retire later and 6% who plan to retire earlier.
  • 32% of workers say COVID has negatively impacted their ability to save for retirement.

has covid made it harder to save for retirement

All statistics in the above section compliments of  2021 EBRI Retirement Confidence Survey

  • 30% of Americans with retirement accounts reported making withdrawals from them in the first two months of the COVID pandemic.  The average withdrawal was $6,757 (Source:  Investment News)

Baby Boomer Statistics

  • Every day, 10,000 Baby Boomers turn 65 years old.  (Source: Legaljobs.com)
  • 8 in 10 retirees report that their overall lifestyle is as expected or better. Only 26% of retirees report spending is higher than expected. (Source:  2021 EBRI Retirement Confidence Survey)
  • Baby Boomer retirements increased significantly in 2020 vs. prior years.  By September 2020, 40% of Baby Boomers were retired. (Source:  Pew Research) Continue Reading…

Why you should (or shouldn’t) defer OAS to Age 70

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I’ve long advocated that anyone who expects to live a long life should consider deferring their Canada Pension Plan to age 70. Doing so can increase your CPP payments by nearly 50% – an income stream that is both inflation-protected and payable for life. If taking CPP at 70 is such a good idea, why not also defer OAS to age 70?

Many people are unaware of the option to defer taking OAS benefits up to age 70. This measure was introduced for those who retired on or after July 1, 2013 – so it is still relatively new. Similar to deferring CPP, the start date for your OAS pension can be deferred up to five years with the pension payable increased by 0.6% for each month that the pension is deferred.

OAS Eligibility

By the way, unlike CPP there is no complicated formula to determine your eligibility and payment amount. That’s because OAS benefits are paid for out of general tax revenues of the Government of Canada. You do not pay into it directly. In fact, you can receive OAS even if you’ve never worked or if you are still working.

Simply put, you may qualify for a full OAS pension if you resided in Canada for at least 40 years after turning 18 (when you turn 65).

To be eligible for any OAS benefits you must:

  • be 65 years old or older
  • be a Canadian citizen or a legal resident at the time your OAS pension application is approved, and
  • have resided in Canada for at least 10 years since the age of 18

You can apply for Old Age Security up to 11 months before you want your OAS pension to start.

Your deferred OAS pension will start on the date you indicate in writing on your Application for the Old Age Security Pension and the Guaranteed Income Supplement.

There is no financial advantage to defer your OAS pension after age 70. In fact, you risk losing benefits. If you’re over the age of 70 and not collecting OAS benefits make sure to apply for OAS right away.

Here are three reasons why you should defer OAS to age 70:

1). Enhanced Benefit – Defer OAS to 70 and get up to 36% more!

The standard age to take your OAS pension is 65. Unlike CPP, there is no option to take OAS early, such as at age 60. But you can defer it up to 60 months (five years) in exchange for an enhanced benefit.

Deferring OAS to age 70 can be a wise decision. You’ll receive 7.2% more each year that you delay taking OAS (up to a maximum of 36% more if you take OAS at age 70). Note that there is no incentive to delay taking OAS after age 70.

Here’s an example. The maximum monthly payment one can receive at age 65 (as of July 2021) is $626.49. Expressed in annual terms, that equals $7,553.88.

Let’s look at the impact of deferring OAS to age 70. Benefits will increase by 0.6% for each month of deferral, so by age 70 we’ll see a total increase of 36%. That brings our annual OAS pension to $10,273 – an increase of $2,719 per year for your lifetime (indexed to inflation).

2). Avoid / Reduce OAS Clawback

In my experience working with clients in my fee-only practice, retirees are loath to give up any of their OAS benefits due to OAS clawbacks. That means designing retirement income and withdrawal strategies specifically to avoid or reduce the OAS clawback.

The Canada Revenue Agency (CRA) calls this OAS clawback an OAS pension recovery tax. If your income exceeds $79,845 (2021) then you are required to pay back some or all of the OAS pension you receive from July 2022 to June 2023. For every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when income exceeds $129,581 (2021).

So, does deferring OAS help avoid or reduce the OAS clawback? In many cases, yes.

One example I’ve come across many times is when a client works beyond their 65th birthday. In this case, they may want to postpone OAS simply because they’re still working and don’t need the income. In some cases, the additional income received from OAS would be partially or completely clawed back due to a high income. Deferring OAS to at least the next calendar year when you’re in a lower tax bracket makes a lot of sense.

Aaron Hector, financial consultant at Doherty & Bryant, says there is a clear advantage to postponing OAS if someone expects their retirement income to push them into the OAS clawback zone.

“Not only will postponement provide them with an enhanced OAS income, it will also in turn provide them with a higher clawback ceiling,” said Mr. Hector.

It might also allow the opportunity to draw down RRSP/RRIF assets between 65 and 70 which would reduce future expected retirement income (lower RRSP/RRIF assets = lower mandatory withdrawals between age 72 and death).

One could also stash any unspent RRSP/RRIF withdrawals into their TFSA. Growing their TFSA in retirement gives retirees the valuable ability to withdraw money tax-free any time and not have that income affect their means-tested benefits (such as OAS).

3). Take OAS at 70 to protect against Longevity Risk

It’s counterintuitive to defer taking pensions such as CPP and OAS (even with an enhanced benefit for waiting) because it forces retirees to tap into their personal savings – depleting their nest egg earlier and faster than they’d prefer. Indeed, people are reluctant to spend their capital.