Saving for Retirement, can you hit the target?

How much do we need and should we save for retirement is a good question? The answer is based on a number of factors lifestyle expected and how long you expect to live. Each country and each individual will have a different approach to finding the right solution for this question. In England, the most widely used measures of retirement income adequacy in the UK are the Joseph Rowntree Foundation’s (JRF) Minimum Income Standard (MIS) and the Pension Commission’s target replacement rate (TRR). MISs were developed in the UK and are based on feedback from a sample of the population on the types of goods and services they deem necessary for a socially acceptable minimum standard of living. The value of this standard ‘basket’ of goods and services is used to assess whether a person’s income is above or below this level.

Currently, the level for single pensioners is £9,998.37 These measures indicate whether an individual is able to achieve a standard of living in retirement that is broadly comparable to that which the individual had during their working life. Income needs in retirement are typically lower than income needs in working life and, as a result, replacement rates are typically expressed as a proportion of the individual’s pre-retirement income. In the table below are the replacement rates suggested by these formulas. I have added a column and translated the amounts to Canadian income. The third column shows what a person could expect to see as a retirement income if they stayed within the parameters of the formulas.

TABLE 1: REPLACEMENT RATES USED BY THE PENSIONS COMMISSION These replacement rates are used by both the industry and policymakers to assess the adequacy of people’s current levels of saving for retirement. However, both sets of measures have substantial drawbacks. The JRF MIS is designed to only give an indication of the minimum income for a socially acceptable standard of living. Given that the State Pension, for most people, already provides most of this amount, and most people aspire to far higher levels of retirement income, it is of only limited use to savers.

PPI, What Level of Pension Contribution is Needed to Obtain an Adequate Retirement Income? (2013) In Canadian dollars

PRE-RETIREMENT GROSS EARNINGS	REPLACEMENT RATE THRESHOLD	RETIREMENT Income expected
$22, 499 or less	90%	Up to $22,500
$22,500-$41,799	70%	$ 15,750 to $27,999
$41,800-$58,749	67%	$28,000 to $35, 219
$58,750-$93,999	60%	$35,220 to $46,999
$94,000 or more	50%	$47,000 plus

 In 2004, the Association of Superannuation Funds of Australia (ASFA) introduced the Retirement Standard. The ASFA Retirement Standard was developed in order to help people plan for retirement, given that research suggested that many people struggle when it comes to developing a budget for their future needs, especially when their retirement is many years away.

It does this by outlining three distinct income levels, as well as the sorts of goods that can be purchased with each. The first income level is tied to the Australian State Pension, the Age Pension. The second and third income levels identify the sort of goods and services that can be purchased with a ‘modest’ and ‘comfortable’ retirement income.

For the ‘modest’ and ‘comfortable’ levels, ASFA has constructed estimates of the annual budgets required by individuals to fund the chosen standard of living in post-work life. The ASFA benchmarks estimate the budgets required by both singles and couples in order to enjoy a ‘comfortable’ and ‘modest’ standard of living in retirement.

They are updated quarterly to reflect changes to the Consumer Price Index (CPI) and also differentiate between older and younger retirees, who often have different needs that require appropriate funding. For each retirement standard, a basket of goods is constructed taking account of expert opinion, national surveys of expenditure and focus groups. The Australian model shows at a glance what your retirement lifestyle would look like and the amount of money you would need coming in to sustain that lifestyle.

  

In Canada and many other countries, people do not know how much they need to save for retirement. This is not a big issue as there are many planners who can help them. However, if there were an unbiased system that showed us a target like the one that is in a place like Australia, then people could be objective. A set of targets could give us a clear and understandable goal. On the basis of this goal, savers would then be able to calculate the amount of savings necessary to deliver the target income.

In January 2018 The Pensions & Lifetime Savings Association and the Hitting the Target Steering Group issued a report on the idea of targets and said “We envisage that the body which calculates the National Retirement Income Targets would host a range of bespoke tools which would allow a saver to select their preferred retirement income target level and be adjustable according to their age, whether the person is in a household made up of one or more people, and the cost of living where the person lives.

In the many cases where people will only be relying on pension saving to achieve their target income, it will be possible to adopt and promote standard rules of thumb. In more complex cases, where people are able to draw on a wider range of assets, e.g. property, inheritance or other savings, the targets could be used in conjunction with online tools which would support savers, and where applicable their advisors, in planning their retirement income.”

Seniors and self esteem

Few of us think about our own self-esteem.  But how we feel about ourselves, our work, our relationship to family and the community and our place in the world is the cornerstone not only of our ability to function and be productive in life but of our mental and physical health as well.  That is a basic concept of human psychology for everyone and that need for self-esteem doesn’t go away when you become older. This post is for those who are caring for senior parents or older loved ones.

When you think about it, this episode of being a caregiver for your ageing parent is not your first crack at caregiving.  You were the caregiver and to some extent still are for your children as they were growing up.  You took care of their every need including their emotional and psychological needs.  And any good parent learns early on that a child’s self-esteem if vital to their success in school and in life.

Now you are in that relationship with your mom and/or dad and while you are not “raising them”, you have taken on the caregiver role which means in addition to worrying about their finances, their physical health, their diet and their living arrangements, their mental health and self-esteem are things for you to consider as well.

Because it’s not us going through those losses, it is hard for us to empathize with the huge changes going on in the life of your mom and dad and the massive impact those changes have on their self-esteem.  For a parent, your sense of self-worth comes from your independence, your ability to take care of your kids, do your job and be useful to others in society.

In the senior years, all of that could disappear in what seems like an instant.  In the eyes of some seniors, they go from being the hero to their kids to being a pitiful old man or woman being taken care of like they were the child.  Their feeling of being useful vanishes and is replaced by a feeling of being unnecessary and a nuisance.  The “things” that they invested themselves in that are symbols of their success which includes their house, their ability to drive and their work all go away in rapid succession one after the other.

Small wonder senior citizens undergo a tremendous drop in self-esteem.  And when you go from thinking highly of yourself to not liking who you are at all, that is a formula for disaster.  It’s a dangerous mental condition to stay in because, without self-esteem, the natural response is to turn to unhealthy thoughts of alcohol or drug abuse or in the most extreme cases, suicide.

As a caregiver, be aware of the self-esteem of your ageing parent and the huge impact moving out of their home and losing their spouse and ability to drive is having on them.  The symptoms of poor self esteem is your parent doesn’t take care of himself like he used to, repeats stories over and over because those stories remind him of a time when he liked himself and seem to launch on desperate adventures to try things he really should not take on just to get a feeling of being someone again.

You can do a lot to build that self-esteem back up in your ageing parent.  Help him get in touch with family and old friends.  Encourage him to talk about the old times and pour praise on him about those days.  And above all, let him have lots of time with the grandkids.  Grandchildren could love anyone into liking themselves.  So let them use a little of that magic on your parents so they can like themselves again. 

Healing Your Past with Meditation

As we move into retirement, we realize it is not possible to roll back time or undo or change bad decisions we made in the past. However, using meditation, we can change the way we feel about the bad decisions we made in the past so that they will stop tormenting us in the present. We all carry a lot of baggage from the past, such things as maybe a broken heart, hurt feelings, or bad memories of friends or loved ones that have lied, cheated, or betrayed us, events that may have brought us pain, or we may torment ourselves over opportunities we may have missed out on or even wrong choices we made in our lives.

We absolutely cannot allow ourselves to let things in the past change or take over our present lives. Meditation is simply collecting our thoughts in a relaxing atmosphere. If you take the time to learn how to heal your past it will enable you to be happy in the present. You may ask how can you heal the past? You can look at past situations you cannot change in a brighter light with a new understanding on the events in the past have hurt you. When your by yourself in a quiet place start your meditation.

Think about how whatever may have happened to you in the past may even be a benefit to you. You know how bad you felt when something or somebody said or did something to you that you felt that you had no purpose in life or was not good enough to associate with others. Meditating about how those things in the past made you feel helps you to understand how others who are now in the same situation you were in then feel about themselves.

You know how they feel so you maybe can tell them your experience back then and how you turned it around and made a life for yourself. So, many of us just need someone to take the time to just say hello or nice day isn't it? Just a kind word to someone who has had a bad day can make all the difference in the world. My mother told me that you can kill more flies with honey. Meditation can make you feel so much more positive and give you a different outlook on life in general, it is something very positive you can do to help yourself.

What I understand my mother meant was if you have been around someone that wasn't pleasant or had a bad attitude don't act like that person does, instead just turn the other cheek and it may rub off on the person who has a bad attitude. Meditation could be the key to this happening. So, you see meditation can be used to turn bad situations into something good or even good situations into something great. Shining the light of the new understanding on those events that happened in the past will help you have a feeling of acceptance, peace, and happiness.

Retirement Investment funds and social issues

I recently read an article that complained about how public pension investment funds were underfunded and were also investing in underperforming stocks that were being used to fund social issues. Members wanted their funds to perform. According to the story, I read, “Ultimately, members reiterated that they want the performance of their funds to be financially driven, strongly preferring to maintain personal control over any charitable donations or socially motivated investments. That focus on financial performance is the biggest and most important takeaway from the Spectrum research – pension members simply don’t see their funds as a political tool to advance social issues and causes.

Sadly, large funds are increasingly being used for activism, with members' retirement treated as a subordinate concern. For example, CalPERS and NYCERS have both embarked on strategies investing heavily in alternative energies at the expense of more traditional energy resources, despite the fact that many renewable energy stocks continue to underperform”

How are public pension plans performing and what percentage of their asset allocation is being used to fund social issues and causes around the world. First, let’s address the performance of the funds. According to the Organization of Economic Cooperation and Development (OECD), the following countries funds did well between 2010 and 2015

Is the risk of investing in renewable energy a problem for pension funds worldwide? According to the OECD, nine funds (worldwide) reported exposure to renewable energy, with Denmark’s Pension reporting the largest allocation (through unlisted equity), followed by two Netherlands Funds. Denmark Pension has increased the share of renewable energy companies in their energy portfolio from 11% to 41% from 2010 to 2014, and expect this trend to continue. As part of its new investment policy adopted at the end of 2015, Denmark plans to invest an additional EUR 4 billion in renewable energy generation. While the changing regulatory landscape in the energy sector brings challenges, it can also give rise to investment opportunities, specifically in renewable assets. Québec Pension Plan, Argentina’s Sustainability Guarantee Fund, all had significant allocations to social infrastructure. 

Looking at the funds above you can see the investment in social causes is not affecting the rate of return of these funds, with the Netherlands leading the world at 7.4% and Denmark in the top ten at 4.1%.

Source: Pension Markets in Focus (pdf file)