We need more bad financial news these days like the NHL needs another concussed hockey player.
But that's exactly what personal finance authority Gordon Pape has given us in his latest book about retirement. It's called Retirement's Harsh New Realities and you can forget any ideas you might have about hyperbole being used to sell books. Not with well-documented chapters carrying titles such as Pension Plans Are Dying, Our Savings Rates Are Pitiful and There Is No Safe Place For Your Money.
I talked to Mr. Pape to find out why he's so concerned about our readiness to retire to a life of financial comfort.
Before we plunge into the harsh realities listed in your book, is anything going well on the retirement front?
We've got the Canada Pension Plan right. In the United States, they're talking about increasing the age at which you can start withdrawing [social security]benefits, and we're seeing similar problems in many of the European countries. The CPP, after years of tinkering in the 1980s and 1990s, is on a very stable course.
One of the harsh realities you mention is that "we're on our own" in terms of retirement saving. But what about the CPP, Old Age Security and the Guaranteed Income Supplement – how significant are they for the average retiree?
They're a basic safety net – that's really the best way to describe them. The CPP is only designed to ensure that you get 25 per cent of your pensionable earnings up to the maximum amount in any given year. OAS is obviously some icing on the CPP cake, but remember there's a clawback that cuts in when your income hits about $67,000.
Harsh Reality No. 4 in your book is Our Savings Rates Are Pitiful. Why aren't people saving more money for retirement?
It's because we live in a consumer society and we're constantly bombarded with exhortations to take more credit, get out and spend, support the economy. … It's the world in which we live. It was easy to save money back in the days before credit cards became widespread. Now, with credit cards and debit cards out there, it's too easy to spend money.
How comfortable are you with the idea of seniors going into retirement with a substantial mortgage or line of credit debt?
I'm not comfortable at all. One of the pieces of advice I give in the book is that even if you have to work a few more years, pay off your debts before you get into retirement. Once your income becomes fixed, you become very vulnerable to a rise in interest rates and you may find yourself having to compromise your standard of living.
When did we get comfortable enough with debt to not only embrace it during our working years, but also in retirement?
We're now seeing the baby boomers at retirement age, and who are the baby boomers? They're the consumer generation. They grew up in this era of loose money, high credit and big spending – it's a mindset. My generation, which is obviously pre-baby boom, grew up in an era where you spent according to what you made and you tried put some money aside.
You say in your book that people "have to make sacrifices" in order to save enough for retirement. What specific sacrifices do you mean?
The No. 1 thing is you have to really work out what you need to save so you can live comfortably in retirement. And then you have to adjust your spending to meet those saving requirements. A lot of the conventional estimates of how much you need to save – like putting aside 5 per cent or 10 per cent of your income – aren't enough.
The tax system is stacked against retirees, according to your book. You've already mentioned the OAS clawback – do you have any other examples?
One of the things that really bugs me is the application of the dividend tax credit gross-up and the phantom income it creates. This affects not only the OAS clawback, but any taxable benefit that is income-tested (for more on this, check out this column written a while back by my colleague John Heinzl).
Another big one that I get a lot of complaints on is the minimum RRIF [registered retirement income fund) withdrawal requirements. They're forcing people to deplete their savings.
Let's talk about pension plans. If I have a defined benefit plan, how confident can I be that I'll receive the full amount of benefits I'm expecting after I retire?
People working at Nortel in the 1990s probably never thought that brilliant, burgeoning company was going to go down the tubes in the 2000s and leave them in a pension crisis. The only advice I can give on that score is to be constantly aware of the condition of your company pension plan. Monitor the annual reports, carefully check on whether it's in surplus or deficit. Obviously, if it's in deficit that's a concern.
What's your best advice to help people in their twenties and thirties save enough for retirement so that they don't have to worry about the harsh realities you cover in your book?
The best advice I can give is to start saving seriously. We have in Canada two of the best government-sanctioned retirement and tax savings programs, the RRSP and the tax-free savings account. I think people should be taking maximum advantage of those. One of the real tragedies in this country is that we have such a low participation rate in RRSPs.
Mr. Pape answered your retirement questions during a one-hour live online discussion on Wednesday, Jan. 11th.
For a mobile version, click here.
Rob Carrick