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The investment industry has done a fantastic job creating a glorious image of life in retirement, with TV and print ads depicting happy couples frolicking on a sunny beach down south or hanging out with a photogenic brood of grandchildren at the cottage. While those ads pretty much accurately reflect the average person's ideal retirement, they say little about how to get there other than urging people to contact a representative.
So what really goes into that perfect retirement blueprint, one that hopefully lands you carefree on a beach some day?
It may sound obvious, but you need to start with a realistic idea of the life you want after retirement, and from that build a financial plan to get there, experts advise. "You have to start right from the beginning, what is it that you want to be doing in retirement, before you can get to the plan," says Chris Buttigieg, senior manager of wealth planning strategy with Bank of Montreal in Toronto.
Once people have settled on what sort of lifestyle they expect, they can get down to crunching the numbers, the BMO executive says. "That is when you can get into the nuts and bolts of a financial plan. Looking at your net worth, your balance sheet of assets and liabilities and also looking at cash flows – inflows, whether they be pensions, part-time employment income and expenditures."
Based upon those calculations, a financial adviser can determine what percentage of your current income you need to support your lifestyle in retirement. Financial experts are all over the map with regard to this figure, from a low of 50 per cent for those who argue spending will drop dramatically in retirement to those who contend that a figure of 70 to 80 per cent is more realistic, particularly for those who want to live large after they quit the 9-to-5 grind.
For those Canadians without a guaranteed and indexed defined-benefit pension, that likely means devoting a significant amount of savings to registered retirement savings plans, registered retirement income funds and tax-free savings accounts. It's safe to say that a large proportion of us are not doing that, based on the ever-increasing pile of unused RRSP contribution room, ever-higher personal debt and historically low savings rates.
"Canadians aren't saving enough, the savings rate over the last 30 years has been trending downward," Mr. Buttigieg says. However, savings have inched up to 3 or 4 per cent from a low of less than 2 per cent prior to the 2008-09 financial crisis, which he takes as a good sign. "We are, as Canadians, starting to take more initiative to save for our retirement."
Sterling Rempel, a certified financial planner and principal of Future Values Estate & Financial Planning in Calgary, similarly believes that people need to start with a vision for retirement that can provide a figure for how much ultimately needs to be saved and around which a financial plan can be built to provide streams of income. "Ultimately we want to plan for longevity, inflation, market conditions and for their health because health and health care are the wild cards in retirement that people might not have considered."
The Calgary-based planner's goal is to create "sustainable, guaranteed sources of income." That starts with Canadian Pension Plan and Old Age Security, which he concedes is not enough to live on for most people.
Mr. Rempel breaks down retirement strategies into account types (what most of us know as RRSPs, RIFFs, TFSAs and non-registered investment accounts) and from there, just how they will funnel money to themselves in retirement.
Regardless of where they have invested their money at retirement (it could be a mix of RRSPs, TFSAs and non-registered accounts), people then have to figure out how best to withdraw that capital so that it lasts through their retirement. He sees three popular strategies: purchasing a "pension-like annuity" that provides a guaranteed income for life, with the downside that there will be no legacy for children; drawing down a balanced portfolio of fixed income and some equities (either registered, non-registered, or both); or purchasing a guaranteed withdrawal product that provides an annuity-like income but leaves some capital to pass on as an inheritance.
Financial advisers vary on their outlook for the average Canadian's retirement. One of the more bearish is Kurt Rosentreter of Manulife Securities Inc. who, while Toronto-based, advises clients in five cities across the country. "When you look at the list people have to do – their RRSP, tax-free savings account, their children's RESP [registered education savings plan], a balance on their line of credit from a kitchen renovation, their mortgage, life and disability insurance premiums – they say they can't do it all and still have a life."
Having heard it all, Mr. Rosentreter understands that some people won't take his advice while others won't be able to save enough for their dream retirement. "The interesting thing is the white collars have the money to do the whole list, but just don't. They would rather spend the money. The blue collars just don't have it because they are drowning in mortgage debt."
His advice is simple: Determine what you need for retirement, start socking away the savings and live within your needs. It's a tall order in a time of ultra-low interest rates and a society built on immediate gratification.
Mr. Rosentreter's grim reality, if it comes to pass, is that advertising agencies are going to have to start hiring old actors for their commercials or make those backdrops a little more threadbare. "Seventy is going to become the new retirement age, or even later. I think the word retirement is going to quickly fade away for everyone except the defined-benefit [pension] folks, the teachers, the nurses."
By the numbers
- The ratio of credit market household debt to disposable income hit 164.6 per cent in the third quarter of 2012, up from 163.31 per cent in the prior quarter.
- Just less than six million tax filers contributed $33.9-billion to registered retirement savings plans in 2010.
- Of eligible tax filers, 26 per cent made RRSP contributions, even with the prior year.
- The $33.9-billion in 2010 represented 5.1 per cent of the total room available to eligible contributors, down from 5.4 per cent in 2009.
- The median contribution was $2,790, a 4.1-per-cent increase from 2009.