Thursday, January 28, 2016

Are we saving enough for retirement? Canada

In Canada the answer appears to be YES

The vast majority of Canadians are saving enough for retirement to ensure a standard of living similar to their pre retirement lifestyle, according to a new large-scale survey of household finances.

A financial survey of 12,000 households by consulting firm McKinsey & Co. shows 83 per cent of Canadians are on track to maintain their standard of living after they stop working, even though 60 per cent of those surveyed reported one of their largest financial worries is not having enough money for retirement.

The findings suggest many people are worrying needlessly because they don’t know how much income they will have when they retire or don’t know how much they will likely spend. Canada has a retirement strategy built on four pillars, which I have talked about before in this blog. The four pillars are:
  • Pillar I Old Age Security and the  Guaranteed Income Supplement

  • Pillar II: Mandatory public workplace coverage (Canada Pension Plan (CPP) and Quebec Pension Plan) 
CPP facts
·         The 2015 maximum is $1,065 a month, if you start at 65.
·         Only 6 per cent of Canadians get the maximum.
·         The average is $537 a month.
·         CPP pensions are reduced by 35 per cent if you start at 60 rather than 65.
·         If wait until 70, you get 42 per cent more than starting at 65
·         On average, men get a third more than women.
·         The maximum contribution this year is $2,480 matched by your employer.

Pillar III: Workplace and personal registered savings (employer-sponsored plans whether defined benefit or defined contribution and individual registered retirement savings plans)

Pillar IV: Additional non-registered savings (e.g., bank deposits, brokerage accounts)

The four pillars are relatively balanced. While Pillars I and II provide some level of retirement income universally, a high rate of defined benefit (DB) penetration and individual registered savings contribute in roughly equal parts to sizable Pillar III assets. Pillar IV is roughly equivalent in assets to Pillar III.

While Pillar III is more important than Pillar IV for most households, the wealthiest households rely more on Pillar IV assets due to the absolute limit on Pillar III contributions

These pillars do not include home equity and other non-financial assets. While some households consume a percentage of home equity and nonfinancial assets in retirement, these assets have not been considered in the retirement readiness assessment, in an effort to take a more conservative perspective.

It’s very hard for individuals, even when they get close to retirement, to be able to say with certainty, I know how much I will have annualy in retirement.

Those who have built a financial plan know, but those who were surveyed who do not have a financial plan usually don’t know how much they will have in retirement.

The survey, which included 9,000 working households and 3,000 retired households, has implications for the ongoing debate about reforming the retirement savings system in Canada.

The findings suggest policy makers should aim for targeted reforms rather than creating retirement programs that may not be necessary for most people or could have negative unintended consequences, such as hampering economic growth.

The group with the greatest savings gap are mid- to high-income Canadians who do not have workplace pension plans, with just 63 per cent saving enough on their own to maintain their same consumption patterns in retirement.

The survey demonstrates the merits of traditional defined benefit (DB) pension plans, which pay a guaranteed level of income in retirement, showing 91 per cent of mid- to high-income Canadians with a DB pension are on track to maintain their lifestyles in retirement, the study says.

The survey shows 75 per cent of those with defined contribution (DC) or group RRSP pension plans will have enough income to maintain the same consumption patterns in retirement. DC pension plans do not pay a guaranteed level of income in retirement, but instead provide income based on the performance of the financial assets in the plan.

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