Good news: We're living longer. Bad news: We're living longer
The Fonz seems like an unlikely investment advisor. Anyone who needs proof that retirement – and retirement planning – have changed irrevocably can find it in commercials during the pre-dawn hours, as icons from our younger years promote retirement and investment products.
In one example, Henry Winkler (The Fonz) has changed since Happy Days painted an idealized view of carefree teenaged years in which no one mentioned money problems. Striking a serious demeanour, he extols the virtues of reverse mortgages as a means of enjoying it more fully. “Isn’t it time you started to enjoy retirement your way?” he asks.
In real-time, a long list of governmental, financial and lifestyle upheavals mean that the route to worry-free retirement has changed and will continue changing indefinitely. Taken together, they will delay retirement for some individuals, and mean an unplanned overhang on the golden years for others.
Real-time changes require serious consideration by those who know that sun-and-sailing will not come easy. According to the Russell Financial Health Index released on January 30th, having a reliable source of retirement income continues as a top concern for Canadians. In the fourth quarter of 2011, this stood at the second highest level since the benchmark was established in 2008.
For many, the top-of-mind financial concern revolves around the federal government’s pension reform plans, including a delay in eligibility for Old Age Security from 65 years of age to 67 years. Political realities make this a real possibility – according to Frances Woolley, Professor of Economics at Carlton University in Ottawa, who has taught public finance for 20 years. She estimates that a one-year delay in OAS payments to 450,000 baby boomers would save up to $3 billion dollars annually on an ongoing basis for each year of the delay. She sees this as a less politically dangerous move than increasing the Harmonized Sales Tax, raising income taxes or introducing user fees for medical care, all of which would lead to voter unhappiness. ”This government wants to get re-elected,” she says.
While change to the OAS appears inevitable, coping with it whenever it happens re-inforces the need for a coherent financial plan, according to Paul J. Greene, a Certified Financial Planner, and President of Paul J. Greene Insurance and Financial Services Corp, in Toronto. This includes double-checking plan components such as insurance and debt reduction, adding that those in pre-retirement years have time to plan for this change since the government will likely opt for rolling implementation. Dealing with it requires advance planning by taxpayers likely to face it and counting on the money in their financial calculations.
Meanwhile, the OAS claw back amounts to a straight line tax since the government recovers $0.15 of the benefit for each dollar of income over of $67,688 per year and is fully clawed back when taxable income reaches $109,764, Greene explains. Greene argues that many pre-retirement Canadians may not be aware of it and become surprised when they get the picture.
Other changes occurred on January 1st of this year, including changes to rules governing the Canada Pension Plan. “The next thing that everybody in this age group needs to assess is whether or not the new early commencement rules for CPP might be helpful,” Greene says. Under the new rules, the restriction on working at age 60 while collecting the CPP has been lifted. For some, that can mean rolling over the money from CPP payments to take advantage of unused Registered Retirement Savings Plan contribution room.
“You might be able to create some additional cash for the investment portfolio,” he says. Those who continue working also continue paying into the CPP, thus eventually raising their benefits. “Extra credits that you earn for working after age 65 are disproportionately larger than have been the case in the past. There is a real incentive in the CPP rules to keep working,” he says.
Those contemplating an early start on CPP payments face a mathematical challenge since the government increased penalties for collecting before age 65. “If someone happened to be age 60 in January of 2012 they get 70% of their maximum. But 60 year-old in 2017 gets 64% of their maximum,” Greene explains. Taken together these changes mean that the CPP has become a planning tool as well as a source of income and may mean a delayed retirement.
A good-news-bad news equation affects the scheduling of retirement, explains Tina Di Vito, Head of the BMO Retirement Institute and author of 52 Ways to Wreck your Retirement –and how to rescue it.
“Good news, we’re living longer, bad news we’re living longer,” she says. Previous generations who had a five-year or ten-year retirement period did not have to worry about running out of money. “The savings that you accumulated generally lasted as long as your retirement did and sometimes you even had a little bit left over to leave to the children,” she says.
Now, some of us will have a 25 or 30 year retirement period. That brings several issues including the need to make lifetime savings last longer, and that in turn affects our retirement planning. “That’s what’s causing us to work longer (if) we haven’t saved enough as we approach our retirement years.”
A part of that equation is the more active lifestyle that retirees have envisioned for themselves. Sailing and travelling needs more money than the proverbial ‘sitting around in rocking chair.’ “That’s what we’re finding is the number one reason for people working longer,” says Di Vito says. “Canadians are realizing that they haven’t saved enough to last them the entire 30 years of retirement so they are going to work a few extra years,” she says.
Delaying retirement can boost an individual’s pension income. A defined benefit plan provides a lifetime pension calculated based on a formula. “The calculation differs between plans but involves the number of years in the plan multiplied by some reference to salary such as the top five years, multiplied by a pension factor, which can be as high as 2%,” she explains. “In that scenario, someone in a plan for 20 years with a salary of $50,000 and factor of 2% can expect $20,000 annually, but by working an additional five years could raise that to $25,000.”
In a defined contribution plan several additional years of employee contributions, plus employer contributions and market growth also means more retirement funding. “Delaying two, three and sometimes four years and not touching that money, letting it grow and in fact adding to it by continuing to save makes a huge impact,” she argues.
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Al Emid is an author and financial journalist covering investing, banking and insurance. In 2005 he received a journalism fellowship in retirement issues from an American educational institution.