What is preventing you from retirement planning?

Over two years ago three actuarial associations (the American Academy of Actuaries, Australian Actuaries Institute, and the Institute and Faculty of Actuaries in the United Kingdom) determined that the trend away from defined benefit pensions and toward defined contribution plans was going to be a major problem.  In 2017 they released a follow-up study that shows the extent of the problem

All three countries have made efforts recently to improve retirement policies; however, the survey would suggest that progress to date in changing expectations and preparations has been modest at best.

In all three countries, inertia and procrastination—broadly characteristic of most people’s decision-making—seem to lead to similar results across all three countries.

People in the United States, United Kingdom and Australia are struggling to prepare for retirement because of increasing demands on them to manage their own risks. This inability to manage the risk of planning for retirement has resulted in many planning not to retire at all, most planning to retire gradually rather than fully, many planning to retire at older ages, and relatively few expecting a comfortable lifestyle in retirement

This could be seen as an adaptation to the risk transfers associated with movement from defined benefit to defined contribution plan coverage.

When asked what they would do if the value of their assets decreased people said they were prepared to save more, acquire more information, and if that fails they plan to return to work. The Actuaries think that a return to work is unrealistic if age or health prevent such a return when needed

When asked about retirement many did not know how much they will need when they retire, how long their money will last. People were also not prepared or had even thought about the risks associated with longevity, chronic ill health, or being forced to stop work unexpectedly early.

From the survey the Actuaries found that the relatively low percentages of middle-aged (for purposes of this survey, ages 34-54) and middle-income (for purposes of this survey, above the bottom 40% and below the top 20%) respondents in all three countries who are prepared to retire or for the risks of retirement were particularly noteworthy.

How can these countries prepare people to understand retirement from a policy position? According to the Actuaries there are a three-prong approach is needed

1.    Financial education: The results clearly indicate a need for more education related to financial literacy and retirement planning. While the results suggest a broad need, the results also suggest the possibility of particularly targeted (and potentially differently designed) educational approaches based on age, gender, and income in all three countries. The education required should aim to establish a comprehensive understanding of the relationships linking accumulated retirement funds, a retirement-age goal, and the risks associated with making retirement assets last a lifetime. Given the widespread lack of knowledge of the level of assets that will be accumulated at retirement and the similar lack of knowledge of how long savings will last in retirement, development of robust and accessible projection tools might serve an important purpose in financial education.

2.    Default options: The results clearly indicate widespread lack of preparation, even when information is sought and some savings are reported. Understanding and managing retirement risks can be extremely complex, and adequate preparation may challenge the ability of many, regardless of the amount of education provided. Incorporating default enrollment into private plans, and making the defaults as appropriate as possible to the situation of the broad majority, would help compensate for the limited attention that most people give to planning for the future. Limited preparation for longevity risk amplifies the need to consider default options that emphasize lifetime income rather than lump-sum distributions during retirement. The very low preparation rates among the youngest respondents, while not surprising, suggest the importance of automatic enrollment in retirement savings programs at the earliest stages of people’s working lives.

3.    Public pension adequacy and sustainability: While public pensions (the Age Pension in Australia, the State Pension in the United Kingdom, and Social Security in the United States) are generally not designed to be the sole source of retirement income, they are certainly an essential part of the retirement package for a majority of citizens. Making sure that those pensions are sustainable and capable of providing adequate retirement income, at least for those who depend on it most, remains of continuing importance. That large percentage of the population at younger and middle ages do not cite government as a source of retirement income may reflect concerns about the sustainability of these programs.

The survey was published Thursday October 12 by the American Academy of Actuaries, the Institute and Faculty of Actuaries and the Actuaries Institute of Australia. For the full survey go here (pdf file)

Family history is it important to you?

A post on A Satisfying Retirement led me to my thoughts, on this issue. In his post, Bob Lowry (The blog's author) asked, What about you? Are you interested in all the twists and turns of your family's past? Do you have old documents that trace your ancestors back to some historical event? Or, like me, do you prefer to let sleeping dogs lie. You aren't particularly motivated to learn about all that?

Bob also posted a link to a site which asked and answered the question Whys is Genealogy important? The short answer according to Bob is  ... some of the reasons include validating family stories, tracing medical conditions or land ownership, finding birth parents and any links to famous people or historical events.

To answer Bob's question I have not been particularly motivated to learn about my history but events and times change. For me, it was a Facebook message that moved me to take some more action.

On my mother's side, I received a message on messenger from a cousin who was exploring his genealogy and had some questions, which I answered. He had been in touch with an elderly cousin who had completed a family tree for our grandmother and wanted more information about our grandfathers family, so I undertook to gather all the information from my brothers about their families and am just about complete in that task. I hope to send it off to my cousin and receive a copy of the updated family tree for my grandmother on my mom's side. All I know is that both my grandfather was born in a village (we don't know which one) in Romania and came to Canada when he was 14. My grandmother was born in1898 in Ciucurova, Dobrogea Austria (now Romania). and moved to the US (North Dakota) with her family and came to Canada when she was 2 with her 11 brothers and sisters and settled into the town my grandfather had moved to from Romania.


When we went to our first family reunion on my father's side of the family back in the 1980's we learned that my grandmother's family had come from Ireland to Canada somewhere between 1840 and 1850, along with many other Irish settlers and the family had settled in Ontario. I was given the names of my great grandparents (Ramsey and McTeer) and learned that someone in the family had created a genealogy chart, which a cousin promised to send to me. I never received it and I forgot about it until recently. I also found out that my grandfather had come to Canada in the 1920's from the United States, somewhere around Michigan area to hide out for a while. We are not sure why he came to Canada, as he had a career as an Accountant, but when he came to Canada he became a farmer where he met my grandmother bought then lost his farm in the 30's, and became a tenant farmer and raised a family. I have over the years tried to find out more about my grandmother and grandfather on my Dad's side of the family but have had little luck.

Going through the family history is important and I hope to continue to find out more about what must have been some fascinating stories.

How much do I need for retirement?

This is a great question and of course, the professionals will tell you that you should be prepared to live on about 70% of what you currently make. Calculating the amount of savings needed to retire is not necessarily simple or straightforward.

There are general “rules of thumb,” such as saving 10 to 15 percent of income – which is one of the first things a Google search for “how much should I save for retirement” would suggest –which is better than no saving or planning guidelines at all. But relying solely on such maxims, particularly for a highly personalized process such as retirement planning, risks glossing over critical aspects. Health care expenses, for example, will be highly variable based on health status and lifestyle factors.

On average, Boomers believe expenses for health care will consume 23 percent of their income in retirement, significantly lower than the 33 percent of income those aged 60 and older currently spend on health care. Of even greater concern, an increasing number of Boomer's estimate costs at the low end of the scale, as 30 percent believe they will need less than 10 percent of income for health care.

Besides health care costs Boomers have to figure out how long they will live, the longer you live, the more money you need to save. One way to think about how much money you will need is to examine what Boomers who are already retired are spending. This will give you a starting point. 

Boomers have a sense of what they think they will need when they retire, and that number is about $35,000 a year. This is close but the actual amount being spent by people already retired is $46,757 according to the Bureau of Labor Statistics Consumer Expenditure Survey, 2013.

We have three pillars of safety in Canada for people as they approach retirement. The first is the Old Age Security Income, the second is the Canada Pension Plan, the third is Personal Registered Retirement Savings Programs and finally, we have Employer Pension Plans. Employer Pension plans are either a defined benefit plan or a defined contribution plan.  

Boomers are spending about $47,000 a year in retirement, where do they get that money?

Here is a very simple example:

Old Age Security is about $6,480 a year

Canada Pension is about $8, 800 a year—This is based on the average payout in 2017 and individual rates will differ widely.

Between OAS and CPP in Canada, a retiree will receive about $15,280 a year. If this is the only income you receive then you may be eligible to receive the Income supplement of between $500 and $800 if you qualify. So that adds another $6,000 to $8,400 and could bring your income up to approximately $22,000 a year.

The rest of the money needed will come from either your employer pension plan if you are lucky to have one or your own savings.  Most Canadians do not have an Employer Pension Plan so they will have to save money in their Registered Retirement Saving Plan.

Most Canadians will be short about $23,00 a year if we continue to spend like those already retired. How much do you have to have to generate an income of $23,000 a year? You may need to buy an annuity of $500,000 or other investments to generate that income when you turn 65.

To save $500,000 at age 45 you will need to save about $1,450 a month. Or if you were 35 you would need to save about $800 a month for retirement.

Retirement savings becomes complex really quickly and most people do not understand the math involved. It is important that you sit down, (the earlier the better) with a qualified retirement specialist who can chart your own path to retirement.

Counterfeit

Another challenge from BrewNSpew The event is to Write a story or poem of 5 Lines or Less using the word counterfeit. Please drop by and join the challenge at Patricia’s Place. Here is the first by -Eugenia

Dang counterfeit news

Is what’s been taught for naught

Just noodle the thought

The wicked have become insipid

The whoo’s vs who’s is not amused

Here is mine, based on a movie from 1936 and a book which was written in 1984

Counterfeit lady,

Ever so Shady

Filmed in the 30’s

Did not meet with success

Recreated in the 80's with much more finesse