Retirement age should it be increased?

On February 1st an article appeared in McLean's Magazine, called  The retirement age in Canada is too low—and that’s a growing problem, it was written by Peter Shawn Taylor and its lead is the following:  The Liberals reversed a plan to push the eligibility age for retirement benefits to 67. It goes against global trends and economic reality.

What is the global reality today? Canada and the United States are two of the countries in the world where workers have to work longer before they retire. According to a study done byAperion Care, the average age of retirement in most countries hovers around the 62-65 age range, there are a handful of countries that plan for workers to leave the workforce even earlier. The United Arab Emirates (UAE) boasts the lowest official retirement age at 49 years old, though the age is 60 for expats (non-UAE nationals). 

The African continent hosts several countries that have low retirement ages. Senegal, Mozambique, and Madagascar are the lowest at 57.5, while most hover around 58-60 years of age, such as Egypt, Tunisia, and Morocco.  There isn’t much information about social services, government programs, or workforce stats but considering so much of workforce is involved in agriculture and labour, over time, a person’s ability to work is affected by the physical toll it takes on their body, and earlier retirement might be necessary.

Other countries, like Russia, Japan, and India, have retirement ages closer to 60, and with large populations of older or retired people. Family obligations, limited opportunity, and rampant poverty keep these large older populations from travelling away and keep them in the workforce longer to be able to make a living.


In Norway, 67 has been the official retirement age since the 1970s and there currently are no serious proposals to raise the retirement age. In 2011, Norway established “flexible retirement” for earnings-related pensions, meaning that Norwegians can draw pensions as early as age 62. Some social science data suggests that Norwegians preferred to retire at 61, then the age rose to 64 in 2013.

In the article, Mr. Taylor states that "According to the Organisation for Economic Cooperation and Development (OECD), Canada’s decision to revert to age 65 bucks a global trend. “Many countries are increasing their retirement age,” the OECD observes."

This argument is that contributing more and for longer, especially by postponing retirement as life expectancy increases, is the best approach to face the challenges faced by increasing longevity. The argument is that the best way to address the problems posed by improvements in life expectancy is to maintain the ratio of years saving for retirement to years in retirement constant, increasing contribution periods as life expectancy increases; or to increase overall contributions. This position is being bought by governments as many countries have responded to population ageing by increasing the statutory age of retirement. Some have linked retirement age to life expectancy.

The fairness of this solution, however, can be questioned when we look beyond the average. Gains in life expectancy have not necessarily been distributed equally across society. A skilled executive, for example, can expect to enjoy nearly four additional years in retirement compared to a manual labourer; this assuming that “retirement” begins at age 65. 

Inequality becomes more apparent when considering the period before retirement. Not only can the manual labourer expect to receive his pension for fewer years, but he can also expect to have made contributions to the system from an earlier age, as the highly skilled worker likely spent a number of years in higher education and began working later. Given the same retirement age, the unskilled labourer pays relatively more into the system to receive his pension for a shorter amount of time.


Automatically linking retirement age to increases in life expectancy across the board may, therefore, be regressive. Life expectancy, time of entry in the labour market and improvements in life expectancy are not homogenous across the population, they vary across different socio-economic groups (e.g., low skill, low-income groups). Hence, the best approach may be to link the number of years contributing to life expectancy. Unfortunately, the data needed for this is not available across all countries and the application across different socio-economic groups may be far from straightforward but it is a better method than adding years of work before people can get their pensions.

Mr. Taylor concludes his article by saying, "In other words, Canadians may now be stuck with a retirement age that gets more out-dated with each passing year. Age is just a number, of course. But 65 stopped being the right number for retirement a long time ago." Around the world, there is some pressure to increase the age of retirement with the average age of retirement being between  62-65, but I believe Canada should not be in a hurry to move it that direction as our retirement age is already higher than most countries in the world.

Watch for more articles and studies that will take the position that we need to raise our retirement age. These positions are a response to the risk of living longer. Demand for protection against longevity risk will only increase as individuals are expected to live longer, and the sustainability of pension funds and annuities providing this protection for individuals has to be ensured. 

Sufficient provisioning for longevity is essential to guarantee that future payments will be met, and the ability for providers to manage and mitigate this risk will allow them to continue offering protection in the future.

Start earlier rather than later Part 2

If everything goes well for us, we will make it through the stages of retirement in good health and will remain active and will have lots of things to keep us happy.  So as we plan for retirement we should develop a personalized spending estimate based on your interests and planned activities. What do you want to do, well, first I think you should decide the lifestyle you want in retirement, including where you will live. Many of us stay in our family home, but some of us downsize or decide on a nomadic lifestyle and just travel. Whatever you do, sit down and estimate its current and future cost.  Your spending will not stay the same,  and you should adjust for inflation, year after year.

While most of us spend less as we age because we become less active and have done those once-in-a-lifetime activities that may not be you. For most people, spending steadily declines after age 75 but starts to increase between 80 and 85 because of medical and long-term care expenses.

After estimating the spending and looking at your sources of retirement cash, you might need to modify the expected activities to make spending match income and assets. When you are planning for your retirement think about inflation, which has averaged about 3% a year over the last few decades. Most of what you’ll spend money on in retirement will increase in price over time. When planning your retirement lifestyle also increases your retirement readiness, preparing you psychologically for the changes retirement will bring.

Health and medical costs will increase as we live longer, We do know that on average most of us in North America will spend between 2 and 3 years needing extra medical care. The wildcards in most retirement plans are medical expenses and long-term care. Their timing and amount are unpredictable. We underestimate these costs and overestimate what our health care and other government programs will pay for because we do not do our research well enough. One of the best ways to control retirement medical expense spending is to maximize insurance coverage. Investigate long term care insurance. In Canada with the rising cost of care and the coverage gaps that exist in provincial health insurance plans, the expenses for long term care can easily add up to thousands of dollars:

• Out-of-pocket costs for a long-term stay at a government-subsidized nursing home can reach as high as $2,161.71 per month.

• The average cost for a room in a privately-owned retirement residence is $1,527-$4,774 per month for a semi-private room and $1,600-$7,750 for a private room.

In Canada, the full cost of long-term care received at home or even in subsidized facilities is not covered by provincial health insurance plans. No coverage is provided for privately-owned retirement residency. So plan to buy or at least investigate this type of insurance. 

Sure, your monthly expenses will be higher because of insurance premiums but your potential maximum out-of-pocket expenses will be lower. If you don’t buy the insurance, you should save more and spend less on other things. You’ll need a cushion in your nest egg for large medical expenses. 

You should have enough guaranteed lifetime income to pay fixed, basic expenses. By having that amount of money you will reduce the stress of retirement. In Canada, The Canadian Pension Plan is the only inflation-indexed guaranteed lifetime income for most people. However, the rules have changed for when you can collect your Canada Pension Plan, so don’t make a fast decision on when to receive it. This is an area that you should research and when you make your choice consider it very carefully.  The right choice can add tens of thousands of dollars of lifetime income.

Even when you retire you need investment and a spending strategy. Of course, these will have to be adjusted as circumstances change.  We plan our retirement but we forget that once we are retired we have to have a spending strategy or we may run out of money too soon.  We believe that we can spend 7% or more of our retirement portfolio each year without the risk of running out of money. You need to establish a spending policy.  I have a spending strategy and it is to spend about 6% of my retirement portfolio. Some people think this is not a good idea, The consensus among financial planners and economists is that the maximum safe spending rate is about 4%. Some say the safe spending rate is even lower.  Most people don’t have a policy, they “wing it.”

At some point, you may not be able to speak for yourself so you have to plan for that reality as well. In your plan, you should 

include documents such as a will, financial power of attorney, advance medical directive and perhaps more, depending on your situation and goals.

You need to determine how the estate will be divided among the objects of your affection and how to meet any other goals you have.  An estate plan should cover more than what happens to your assets after you pass away.

You also need to ask whether it is likely you’ll have to help support either your children or parents or both at some time during retirement.

Of course, you should plan who you want making decisions when you might need help in the later years.

Surprise

Surprises are life's ultimate way of gradually waking you up from a deep, deep sleep. 

Good and plenty and around every corner you will find a surprise if you look hard and long enough.

Start earlier rather than later Part 1

Planning for retirement should start earlier rather than later, but many of us put off this planning until we are in our mid 50’s.  But to have a prosperous retirement you need a plan. Forming a program that allows you to plan for a retirement that is everything you dream it could be will challenge you to prudently consider some essential points.

Some people will write down their plan, others will talk about their plan and perhaps sketch an outline for the plan. However, surveys of retirees show that those who have written their plans down are happier than those who don't write their plan down. 

Life is full of unexpected events, and we cannot plan for all of them, but those who create plans believe that their plan will reduce uncertainty, and it gives you reasonable expectation of success. With a plan, hopefully, you will look at what your expectations about retirement are and you will be able to understand if those expectations are realistic for you or not. 

How do you start to plan, well I think like any good plan you start at the end (what results do I want) and work backwards. So the first question could be When will I die or what is my life expectancy? 

If you are going to live until you are let's say 85 you will plan differently that if you think you will live to 75. The problem is that we don't know how long we will live so we guess. Our guesses are based on family history, our health, and all other factors we can think of when we sit down to do this task. The problem is that we underestimate our life expectancy and that of our loved ones. So if we get the first question wrong, our plan is off to a bad start. So I suggest you make your best guess as to when you will die and then add 10 years to the number if don't you live that long you may not run out of money.

Women and men have different life expectancies, so the odds are if you’re married, one of you will die before the other and you need to plan for that reality because your income and expenses will change after one spouse passes away.

So you have an expiration date, so looking at your life when do you think you will want to retire and how many years do you want to spend in retirement. When do you think you will be ready? Many younger people think they are ready now, but they probably are not ready. Retirement readiness is a state of mind. Being ready means you are happy to leave your workplace, including partners, structure, the sense of purpose and the activities associated with it. 

Once you determine your ideal age for retirement, you can start the transition to retirement by over months or years, reducing working hours or increase vacation time. If life were ideal we would slowly transition into retirement, but life isn't ideal and sometimes your retirement date isn’t always in your control. When you’re more than a couple of years from retirement, your plan should include a possibility that you might retire before you intend because of health or the economy.

You have an expiration date, you have a planned date for your retirement. It is now time to think about two things, How much money will I need and how will I occupy my time.

Many of us believe that we are not putting away enough for retirement and want to find ways to save more. While some money will be needed for everyday living expenses, medical issues and hobbies to occupy your time. To help find money start by simplifying your finances. Be practical and accept that it will take time to get everything finished.

The first step is to organize information and documents about your current situation, and then research alternatives and decide on a course of action. Some simple tasks you can do during relatively short periods each week. For more involved tasks, you might need to set aside a half day or more at different times during the year.

  

Here are some ideas to think about as you focus on your retirement finances. One review your bank and financial accounts.

Financial firms count on your inertia. They may offer good deals to entice customers, then over time either reduce the benefits or don’t keep up with what others are offering. Schedule a meeting with your financial institution and ask if you can get better terms, and then see what others offer. For example, if your checking account is at the bank that holds your mortgage, the checking account should be free with no, or a very low, minimum balance. Or if you have most of your investment accounts at one discount broker, you should have free checking, no annual account fees and other benefits. You also should be able to link accounts so that if you go to the website, you can log in once and see an overview of all your accounts at the firm. You shouldn’t have to log in to each account separately.

Secondly, consider the consolidation of your accounts. Most people have too many accounts and too many investments. Often, they purchased mutual funds and opened accounts over the years for good reasons, but didn’t monitor them. Now, they have multiple accounts and funds. Not only are their finances unnecessarily complicated, but they’re missing opportunities to reduce or eliminate fees. By consolidation, you may get better service and a reduction of fees.

Manage credit cards, the rules may have changed or your circumstances may have changed. Rewards programs for debit cards generally were scaled back or eliminated over time while credit card rewards programs have improved. Study the rewards programs for your current cards. Then, manage your spending and finances to maximize the benefits.

For example, some cards give higher rewards for certain types of spending (gasoline, restaurants, etc.) and most place an annual limit on the amount of rewards. It also is a good idea to compare the rewards points you earn from a card to its annual fee or other costs. Be sure the rewards you receive exceed any costs. If you’re ambitious, survey the cards available and consider changing to the one that’s best for you.

Think about refinancing your loans and mortgage. Take some time to ensure you’re receiving the best deal on your loans, especially first mortgages and home equity loans. You might be able to refinance to lock in a lower rate or a different loan term. The easy way to do this is to discuss options with your current lenders. If that doesn’t deliver a better deal, contact other lenders to find the best deal for you.

Doing the bills is a task that many of us don't like to do, so think about automation. Technology can simplify your financial life. Recurring bills automatically can be charged to payment cards or deducted from financial accounts. Many financial institutions charge late penalties,  by automating your payment, you avoid late payments and check printing costs, and save time. Automating bill payments also can make it easier to see how much you’re spending and where the money is going. By knowing where your money is going you can save more for retirement and will have money to do what you want to do.