As the leading edge of the baby boom approaches retirement they are confronting a big challenge—there has seldom been a worse time to live off savings.
More than 60% of Canadians have no company-based pension plan and with interest rates at rock bottom, the payoff on safe government bonds may not be enough to even keep up with inflation.
That means it may take $1 million in investments to generate the same retirement income today as $500,000 would have generated five years ago, analysts say.
Canadians instinctively know they are headed for choppy waters. Independent polls reveal a common theme of growing anxiety, with more Canadians expecting to delay retirement, believing they will need to lower their standard of living and a majority fearing they will one day run out of money.
Susan Eng of CARP, the advocacy group for Canadian seniors, says the problem is that boomers have simply not saved enough, and many that did saw their nest egg devastated in the 2008-09 economic storm.
On top of that, the post-recession landscape of high risk, volatile markets, and low-yield investment expectations is not a good time to do catch-up.
“We get calls when things go bad,” said Eng. And there’s plenty of examples of things going bad, she added.
These include seniors with unreasonable expectations of the lifestyle they can expect in retirement, trusting their finances to unqualified advisers, or retirees hit by bills they had not expected, such as the high cost of chronic care or residential care.
“A full 25% of people in the middle income group, not the poor but those in the $50,000 to $80,000 income group, will have a dramatic drop in their standard of living on retirement,” she said.
“The low growth environment is changing a lot of financial plans,” said Steve Shepherd, vice president of equities with the Bank of Montreal. “People have to accept that they are going to need to save more, work longer or perhaps re-evaluate their expectations for retirement.”
According to Statistics Canada, someone retiring at 65 should expect to live another 20 years, and thousands will make it to their 100th birthday.
That’s a lot of time to live off savings, and retirees must also calculate that inflation is eroding assets with each passing year.
“The question is how much can I safely remove from that portfolio every year. Anything over 3% in today’s conditions starts to nickel and dime you and you wind up taking out too much for the amount to time you will live,” said Adrian Mastracci, a portfolio manager with KCM Wealth Management.
While most retirees will have some secure income through the Canada Pension Plan and possibly Old Age Security, Eng said the government should do more to help individuals entering retirement years. Her key suggestion is for an expansion of the CPP to lift the maximum benefit from $12,000 annually to about $16,000.