The Dilemma for Canadians ... the age at which retirement benefits would be paid needs to be raised to somewhere around 105

[DragonflyProperties]

Hi all,

Following is the Editorial from the June issue of Benefits and Pensions Monitor magazine. It is a sobering look at the situation that (too) many Canadians will find themselves in at retirement age. As a side note, and I don`t recall the exact details, there was an original plan in place and Bismarck had a backup plan (plan Bismarck) in case required; this is where Plan B comes from. The way I see it, if people don`t have investment real estate as their Plan A, it makes for a pretty darn good Plan B.



The von Bismarck Myth



When questions are asked about the sustainability of pension plans given today`s longevity, Otto von Bismarck is often introduced into the conversation. As the Chancellor of Germany during the last half of the 19[sup]th century, he created, in 1889, the first state old age pension system. Those who cite von Bismarck to justify raising the age at which retirees can collect pension benefits offer the fact that he picked the age of 65 because that was the age at which the average German died. In fact, several on-line sources – including Wikipedia – dispel this saying the age at which benefits would be paid was 70 and the average German in the late 19[sup]th[/sup] Century died at age 45. Indeed, it was not until 1916 that the age was lowered to 65.



High Mortality Rates



Now, in case anyone looks at this and wonders how anyone in Germany could have collected a pension, remember, mortality rates include everyone. If an infant dies before their first birthday, for the average mortality rate to be 45, someone has to live to age 89. This was an era of high mortality rates for infants and mothers giving birth. Health and safety practices were not what they are today which meant workers died younger and more often on the job. The fact that the average German lived until age 45 meant that there were a number who did live past age 70 and collected their pensions. Bismarck himself lived to age 83 and was eligible to collect the pension for the last nine years of his life.



The dilemma we face now with men in Canada living to age 78 and women to age 80 is that to do something comparable to 19th[/sup] Century Germany means the age at which retirement benefits would be paid needs to be raised to somewhere around 105.



style="font-family:Verdana">The whole mortality bell curve has changed and shifted. Instead of a gradual rise in deaths to a median age and then a corresponding gradual decline, there is a long rise to the right side of the chart and then it sort of drops off. So, increasing the age at which pensions are paid out even to age 70 has a minimal impact on the overall expense because most people are still living close to 10 years past that. This means state and employer Defined Benefit plans, as well as employee Defined Contribution plans, have to last longer and longer into retirement.

Can`t Keep Working



We need to be aware, as well, that one of the main reasons that people retire before the age 65 is health. One esimate suggests a third of people retire because of health reasons. While we have not seen numbers, we suspect it escalates the closer you get to 65 and then starts increasing even more after that. So the question that needs to be answered is `if we require people to work longer before they can collect their pension, will they even be physically able to?` We may be living longer, but there is nothing to indicate we are any more capable of working longer. This is of particular concern in Canada where, according to industry statistics, more than three-quarters of workers in the private sector have no employer pension and are relying on their own savings (if any) and government old age security programs to fund their retirement.



This means millions of Canadians may well find themselves trapped into never retiring simply because they can`t. Financial considerations will be the driver for raising the age when retirement benefits kick in. The unfortunate part is that those Canadians who were not fortunate enough to land a government job or did not make enough to save for retirement will have no choice about when they can leave the workforce, if ever. They`ll simply try to keep working until their health prevents them from doing so.



Keith

 

[wealthyboomer]

IF YOU’RE PETRIFIED BY THE THOUGHT OF SAVING A MILLION DOLLARS FOR RETIREMENT, IT’S TIME TO RELAX. YOU CAN RETIRE WELL ON LESS THAN YOU THINK.

When Kyle and Angela Martin started planning their retirement more than 20 years ago, they wondered how much they would need to live on once they stopped working. Their financial planner told them that the answer was well-documented. All the experts agreed that they would have to replace 70% of their pre-retirement income to live comfortably in retirement.

So Kyle, who worked as a market researcher, and his wife Angela, who worked in real estate, took a big gulp and started saving. They knew that replacing 70% of their combined $100,000 income wasn`t going to be easy. They would need a $1.5-million nest egg when they retired at 60 to generate the inflation-adjusted equivalent of $70,000 a year for the rest of their lives.

The Martins (whose names we`ve changed) gave everything they had to the job of building up their retirement stockpile, but in the end they managed to accumulate only $1 million-a mere two-thirds of what their planner had told them they needed. As Kyle and his wife approached retirement in 2001, they readied themselves for some lean years.

Only it hasn`t turned out that way. So far they haven`t even touched their $1 million in retirement savings.

"Not a dollar has come out of our RRSP," says Kyle, who just got back from a month of golfing in sunny Florida. "But we`re living well. I`ve got a nice house, a nice car, and my wife has two beautiful fur coats and lots of jewelry. We have plenty to live on, and in a few years when the law says we`ll have to start tapping our retirement savings, our income will double. In fact, it will be so high, I don`t know what we`re going to do with it at all"

As the Martins will tell you, retirement isn`t nearly as scary as many people would have you believe. Most retired Canadians live comfortably on half their working incomes-and a big chunk of that money comes to them from government pension plans. If you`ve been tossing and fretting because you don`t have enough saved for retirement, it`s time to relax. In all probability, you`re doing a lot better than you think you are.

Few topics in financial planning generate as much heat as the debate over how much you need to retire well. The financial services industry-which, after all, has a vested interest in encouraging you to save as much as possible-has preached for years that you need to generate 60% to 70% of your pre-retirement income to live comfortably in retirement. One mutual fund company recently bumped the recommended replacement ratio up to 80%by assuming that you will spend just as much when you retire as you do while you are working.

What the company doesn`t explain is how a couple is supposed to achieve that 80% figure. To achieve that goal, a middle class couple in their mid-30s would need to hunker down and put away a couple of million bucks to retire comfortably. That would require them to save a third of their incomes every year.

Fortunately, the evidence doesn`t agree with the scary numbers.
We asked Statistics Canada to crunch the numbers for us and find out how much retired Canadians are living on as a percentage of their pre-retirement incomes. StatsCan discovered that the average Canadian couple comes nowhere close to replacing 80% of their working income in retirement. Here`s Some good news, the average couple replaces more like 45% to 55%of their working income.

Yet those retired couples are far from destitute, says Malcolm Hamilton, a Toronto-based actuary and worldwide partner at Mercer, the benefits consulting firm. Numerous surveys show that most retired Canadians are living just as well as they were when they were working. "When you tell people that senior couples have about half the income of a working family, they say, `Oh, those poor dears! Theirs must be a life of misery and destitution" says Hamilton. "But it`s not at all. And the seniors know it."

Seniors are able to live on less than they did while they were working because their expenses are less. They`ve paid off their mortgages and put their kids through school. They no longer have to save for retirement because they are already retired. Even their tax bill is less because they no longer have big salaries.

Hamilton says most people don`t understand the reality of retirement because they get misled by the apparent size of younger people`s paycheques. But how much you earn has little to do with how well you live. What determines your standard of living is how much you have left over after expenses.

The first stage of life, says Hamilton, occurs when you`re in your 30s and early 40s. Your paycheques are stretched to the limit and you never seem to have enough. At this stage, you`re probably paying 30% of your income to taxes and other deductions. Another 20% goes to your mortgage and another 10% to looking after the kids. That means that you and your spouse are living on only 40% of what you make.

The next stage occurs in your late 40s and 50s. You wave goodbye to your kids and burn your mortgage. Suddenly, you feel a lot richer-and that`s because you are. Your available cash flow has just leaped from 40% of your gross pay to 70%.

Unfortunately, you have to pour most of that increase into saving for retirement. If you put away 10% to 20% of your gross income, you wind up living on 50% to 60% of your pay.

The final stage is retirement. You could aim to replace 70% or 80% of your working income, just like the mutual fund companies say .But if you did you would have far more money than you ever had during your working life. That`s the amazing truth that many people fail to grasp: you can live on 50% to 60% of your working income when you retire, because that`s exactly what you were living on when you were working.

The news gets better. You don`t have to replace all of that 50% to 60% of your working income from your own savings. Government chips in far more pension money than most people realize.

The average combined monthly benefit from Old Age Security and the Canada Pension Plan is $11,300 per person, so a typical working couple can expect to get about $22,000 a year from the government. If you both worked and contributed to CPP your whole lives, you could get as much as $32,000 a year. As Kyle Martin puts it: "When I read about saving for retirement, I never, ever see anyone mention that the first $25,000 a year is in the bag."

The government money makes a huge difference, Kyle says. Right now, he and Angela get about $25,000 a year from the government, plus several thousand in interest from savings outside their RRSPs, and a few thousand from two small company pensions. Their total annual income adds up to $36,000 and that`s plenty, because their expenses have plummeted since retiring.

"A$100,000-a-year couple is really making more like $60,000 a year after expenses and taxes when they`re working," he says. "So after the government money, a $500,000 RRSP is easily enough to provide you with what you`re used to."

Hamilton agrees. "For married couples with children who buy a home, the replacement income that you need typically comes out to around 50%," he says. "You get a 20% break from low taxes when you retire, and you`ll get a 30% break from not having a mortgage or kids to look after. So that means you can live on 50% of what you were living on before."

Most middle-class couples can save what they need for retirement without enduring hardships along the way. For instance, if you and your spouse are making $100,000a year while you`re both working, you will probably need a total income of $50,000 a year after retirement. Assuming that both of you stay on the job until 65, the government will provide the two of you with about $30,000 a year in CPP and OAS. That means you only have to save up enough in your pensions or RRSPs to provide the two of you with an income of $20,000 a year. If you have a corporate pension, it will provide you with a good chunk of that $20,000.

But even if you don`t have a company pension, you don`t have to starve yourself while you`re working to afford a decent retirement.

A typical couple, Hamilton says, should do just fine in retirement if they payoff their house and each accumulate a nest egg of $200,000.

Of course many of us want to do a bit better in retirement than just get by. Hamilton notes that `wealthy couples often work very hard for their money, and see retirement as the reward years. Many want to spend those years traveling the world, or indulging pricey pursuits such as sailing. In other words, they want to live better in retirement than they did when they were working. If that`s you, you`ll probably need to replace more than 50% of your working income. But do you really need 80%?

To find out, you might want to talk to Dave Gower. He worked his whole life as an economist for Statistics Canada, and when he retired, he got one of those gold-plated government pensions you`ve heard about. He was able to retire just a few months after his 55th birthday-a dream retirement age for many-and his pension still replaced a full 63% of his working income.

Gower is now 64 and says he has plenty to live on. He has a nice, fully renovated house in Ottawa, and he`s planning on buying a brand new car soon, which he`ll pay for in cash. He doesn`t travel much any more, he says, but that`s because he did more than enough travelling when he was younger, not because he doesn`t have the money. Gower prefers to spend time at home with his dog and cats, taking it easy in his new "cat-proof" La-Z-Boy.

Gower says the idea of the impoverished senior is largely a myth, and he can`t figure out why he gets seniors` discounts when he`s never had more money. "I`ve gently chided them at Burger King when they`ve looked at me and said they`ll give me a discount," he says. "I`ve told them, `Don`t you know that seniors are better able to pay full price than most people?`

Gower says he`s got lots of money in his RRSP that`s just sitting there, unused. He`s not spending all of his income, even though it`s only 63% of what he made before. Yet next year, when he turns 65, that income will go up. "I had just assumed that I was making too much to get old Age Security, so it would all be clawed back. But it turns out I`m eligible for the full amount," he says. "I was surprised to find out that you have to be making more than $100,000 to have it all clawed back." So what will he do with the extra money? "I really don`t know," he says. "But that`s got to be one of life`s more pleasant problems."

Hamilton says that Gower`s situation is actually quite typical. Many seniors find themselves with extra money. They wind up saving it, even though they really don`t have anything to save toward. "Of all the age groups, seniors have the second highest savings rate," Hamilton says. "They save at a rate that is just behind couples in their 50s who are at their earning peak."

Much of this excess savings happens because we slow down in our late 60s and 70s, whether we want to or not. That means that even if you want to live it up in retirement, you probably only have to budget for about 10 years of the high life.

"If you want to live large in retirement, split your savings in two," says Hamilton. "For the first chunk, just think about what you`ll need to maintain your regular standard of living, which is what you`re used to. For the second chunk, think about how much you`ll need for those once-in-a-lifetime things you want to do in your 60s, because once you reach your 70s, you`ll just want to relax."

Planning for retirement" is all about balance. Sure, you don`t want to live like a pauper when you`re retired-but living like a pauper while you`re working so you can live it up in retirement is even worse. If you follow the industry advice to try to save up enough money so that you can live on 80% of your working income when you retire, you become a slave to your own retirement. You scrimp and save for your whole life to finance 10 luxurious years when you retire.

Hamilton says a better solution is to aim to live on a steady 50% to 60% of your working income-not including mortgage payments, savings and supporting the kids-no matter what stage of your life you`re in. "It`s good to prepare for retirement," he says. "But you shouldn`t become overexcited by your ability to foresee what the future will bring. Life is filled with mysteries, and it`s hard to predict when you`re going to want to retire, what your career will be like, what your health will be like, and all these other factors that have a big impact on what you`ll need."

So put away the complicated worksheets and stop lying awake at night trying to predict what the markets will be like decades from now. Your retirement solution is simple. "Live frugally, spend your money sensibly, don`t cheat yourself out of things you need while you`re raising a family, and get out of debt fast," Hamilton says. "If you do all that, you’ll be just fine."

Source: Moneysense Magazine

 

[wealthyboomer]

CPP Investment Board

Jun 23, 2008 13:00 ET
Majority of Albertans and Other Western Canadians Unaware That CPP Was Successfully Reformed 10 Years Ago
Chief Actuary of Canada says plan is sustainable throughout 75-year forecast period

CALGARY, ALBERTA--(Marketwire - June 23, 2008) - Ten years after the fact, two-thirds of western Canadians are still unaware that the Canada Pension Plan (CPP) has been successfully reformed and is supported by a $123 billion fund designed to help sustain the plan for the long term.

In a recent Ipsos Reid survey, 66% of Albertans said they were unaware of the successful reform of the CPP by the federal and provincial finance ministers.

Further, the survey shows more than a third of Albertans and slightly more than 40% of the rest of western Canada felt the CPP would be out of money when they retired.

In remarks to the Institute of Corporate Directors in Calgary today, David Denison, President and CEO of the CPP Investment Board, emphasized that the plan is sustainable throughout the 75-year period of the Chief Actuary of Canada`s forecast. CPP contributions are expected to exceed annual benefits paid through to the end of 2019, providing a 12-year period before a portion of the investment income is needed to help pay CPP benefits.

In his remarks, Mr. Denison identified the five most common questions Canadians have regarding the CPP:

- Will my pension be there for me when I retire?

- Can the Canada Pension Plan Investment Board really make investment decisions independently from government?

- Why invest so much internationally, especially when the Canadian economy is doing better than many other countries?

- Why don`t you just invest in passive, indexed investments, rather than pursue programs such as infrastructure, real estate and private equity?

- What are you doing in the area of responsible investing?

Mr. Denison dispelled the myths some western Canadians hold to be true about the CPP. He said that Canadians would rest easier about the health of the CPP if they were more aware of its success story, again pointing to the Chief Actuary of Canada who estimates the CPP Fund will grow to approximately $310 billion at the end of 2019.

Canadians are also unaware that the CPP Investment Board is protected by strong legal safeguards. The safeguards are so strong they require the agreement of two-thirds of the provinces with two-thirds of the population and the federal government to amend legislation or regulations governing the CPP Investment Board. This formula is more stringent than the amending formula of the Constitution of Canada and reflects a high standard of required consensus.

Mr. Denison stressed how the CPP Investment Board was created with a unique governance model that strikes an effective balance between independence and accountability. He explained that the investment-only mandate and arm`s-length status from governments allow the CPP Investment Board to make decisions that are truly independent.

Also, as a global investor helping to secure the future pensions of 17 million Canadians for generations and decades, Mr. Denison added the CPP Investment Board will be increasing investments globally over time as a key part of its diversification and risk management strategy. However investments in Canada are a large part of the Fund, with approximately $65 billion invested at home.

Another question some Canadians have posed is whether passive investing is more prudent and effective than active investing. Active management strategies by investment professionals at the CPP Investment Board have delivered more than $5.3 billion in added value above the market-based benchmark over the past two fiscal years. Mr. Denison noted that the objective is to be a more active, value-added investor seeking opportunities in global markets, which plays to the inherent strengths of size and a long investment horizon of the CPP Investment Board.

A final point made by Mr. Denison reflected the steps being taken by the CPP Investment Board in the area of responsible investing. The CPP Investment Board`s Policy on Responsible Investing is the roadmap by which it assesses environmental, social and governance (ESG) factors as they affect the risk and return parameters of underlying investments. This is guided by the belief that responsible corporate behaviour with respect to ESG factors can generally have a positive influence on long-term financial performance. The approach is consistent with the United Nations Principles for Responsible Investment which the CPP Investment Board helped formulate, Mr. Denison added.

Mr. Denison is in Calgary today to begin the first leg of a series of public meetings across western Canada in June.

About the CPP Investment Board

The CPP Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPP Investment Board is investing in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments. Headquartered in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm`s length from governments. At March 31, 2008 the CPP Fund totaled C$122.7 billion. For more information about the CPP Investment Board, visit www.cppib.ca.

 

[ccameron]

So very true! My mother is in that very position now. She has worked full time since she was 18 years old. Most of her career was spent in management for the same non profit organization. She then ventured out to start her own business, and finally is working for the casino. The problem is that the shift work is long and unusural hours( 5:00 pm -4:00am). She is now 64 and although she looks great, I know that this job kicks the hell out of her! She would be able to retire this year if she was willing to forgo future drug and dental benefits. If she works for another year and a half she will be covered by benefits for life. What choice does she have? And although she is probably one of the luckier ones it is still not a wonderful position to be in. Regards Chris

 

[DragonflyProperties]

From today`s issue of USA Today:

Special Report - Inflation Squeezes Retirees

For many today, golden years mean less travel, more work. Excerpts:

Lynda and Don have pensions from their former employers, so they`re not likely to run out of money. But retirement is costing far more than they`d imagined.

Even the well-off are scaling back.

Twenty-one percent of affluent 60-year-olds are canceling, shortening or postponing a vacation because of the economy, and 22% said they`re contributing less to charities, according to a survey conducted in April by Bell Investment Advisors, a financial services firm in Oakland. The 60-year-olds surveyed had at least $1 million in investment assets.

Many of today`s retirees overlooked the risk of inflation when they were planning for retirement, in part because inflation had been so contained in recent years, says John Sestina, a financial planner in Columbus, Ohio.

What these retirees forgot, he says, is that even though inflation over the past 80 years has averaged about 3% a year, there have been prolonged periods when inflation averaged 6% or more a year. During such periods, Sestina says, retirees essentially have two options: Cut back on spending or return to work.

Some retirees are coping by returning to work or finding part-time jobs.

Not surprisingly, businesses that cater to the leisure activities of retirees are hurting.

She doesn`t regard herself as a particularly big spender, but adds, "As long as I don`t bounce any checks, I truly am not worried about money."

"It`s a different world than we ever anticipated."

http://www.usatoday.com/money/perfi/retire...nterstitialskip

Keith

 

[DragonflyProperties]

From the July 3rd edition of the The Province newspaper. Excerpts:

Canadians planning for retirement should take into account they`re living longer and spending more on health care, says the head of one of Canada`s leading financial services companies. "All this adds up to a growing risk of people outliving their money," Dean Connor told a Vancouver Board of Trade luncheon yesterday at the Renaissance Vancouver Hotel Harbourside.

Perhaps most important of all, workers need to personally plan ahead for a long, potentially expensive retirement. "Individuals need to accept greater responsibility for their present and future health, and to factor the cost of health care into their retirement planning," he said. "They need to open their minds to the possibility they could outlive their assets, and seek advice from those who have access to the full spectrum of solutions."

http://www.canada.com/theprovince/news/mon...5f-add3c6cd69b0

Keith