What you think you want to do and what you end up really doing for your retirement appears to be different.  Should those of us nearing retirement adjust our expectations to reflect a more realistic view of what will really happen?  It is somewhat in our human nature to dream a little without firmly determining how realistic those dreams are given the various realities that can impact how our future life unfolds.  Some interesting facts have jumped out from a recent poll including the general finding that retirement expectations held by Canadians (how you think you’ll spend your time) often turn out very different once reality sets in and you get to those retirement years.

Based upon the results of a 2011 poll sponsored by RBC and reported on in the December 14th addition of the Ottawa Citizen, retirement dreams of spending winters in the sunny south are just that, dreams.

The poll focused on the expectations of near retirees versus those already retired.  Some of the interesting results include:

• nearly 75% of Canadian over 50 think they’ll spend retirement days travelling but only 58% of those retired spend their time away from home
• 30% of those nearly retired or over 50 believe they will spend winters down south and summers in Canada – the snowbird lifestyle – but only 14% of those retired live the snowbird lifestyle
• 60% of women near retirement expect to do volunteer work once retired but 41% actually do
• 53% of men near retirement expect to do volunteer work once retired but 35% actually do

The poll was conducted on line by Ipsos Reid between February and March and surveyed 2,245 adults in the 50 and over age group with assets of at least $100K.

More poll details are available at the following link:

http://www.rbc.com/newsroom/pdf/1213-2011-snowbirds-poll.pdf

Given RBC sponsored this poll, financial planning is being pushed to assist the near retirement group to examine options.  The results of this poll and other polls described in Lifepast50 posts, point to the fact that flexibility is needed as you consider how you’ll spend your time.  Working through your retirement expectations and determining how you might get there along with your capability to achieve those expectations is a worthwhile endeavour.

I recently attended a workshop sponsored by the Bank of Montreal (BMO) and Nesbitt Burns entitled “Taking Charge Of Your Retirement”.  I must state upfront that I have a family member that works for BMO.

I want to present an honest overview of what I learned despite the family connection to the organization running the workshop.  I did find the workshop very useful and informative as it made me look at a number of retirement associated factors that I hadn’t fully considered.

The workshop was led by Dr. Amy D’Aprix.  She is the BMO Life Transition Consultant and her role for BMO is to help coach clients on retirement planning.  She clearly notes that she isn’t a banker but a gerontologist.

Ideally the workshop should be attended by you and your significant other…..allowing you to compare notes and see where differences may exist associated with your “retirement picture”.

The workshop began with a short introduction pertaining to Dr. D’Aprix and then workshop participants interactively worked through the various components guided by a “workshop companion” – a collection of forms identifying topics to be discussed.  The forms allowed you to take notes and to fill in your responses to the various topics and questions posed.

The first form presented a series of statements and participants noted whether these statements were true or false.  The statements covered various topics which were intended to get you thinking about other lifestyle factors instead of just financial data.  Some examples included: “For the first time in history, Canadian adults have more parents than children”, “11% of Canadians expect that some of their retirement income will come from from the lottery”.   By the way, both of these statements are true.

The workshop then gently slides into a presentation regarding your retirement picture containing 4 corners covering relationships, lifestyle, health and home.  These 4 corners are then “framed” with financial implications that give your retirement picture stability.  These frames are identified as Cash Flow, Investments, Tax Considerations, and Contingencies.  To see more details regarding this, head to the BMO website and find the “Take Charge of Your Retirement” web presentation.

After gaining an understanding of the “retirement picture” structure, the workshop heads into discussing your individual and particular preferences regarding the who, what, how and where factors (these are relationships, lifestyle, health and home respectively) – who will you spend time with when you retire, what do you picture yourself doing in retirement, where will you live in retirement, and how might your health impact your retirement. The interactive nature of the workshop allows you to gain a better understanding of these “4 corner” topics and compare your answers and feelings to what others identify.

Some of the key items I walked away with:

• think about your life and not just the money
• think of your wants, needs and desires as you look at retirement (your picture) and then set up or assess your plan (the frame) to help you meet your desires – examine your future based on the workshop directed questions intended to allow you to articulate your retirement expectations
• work with your significant other to see how things align (the next steps associated with alignment or lack of alignment are entirely up to each individual / couple)

Overall the workshop is an obvious shift by a bank away from a traditional number crunching approach to a more people and lifestyle oriented approach targeted at helping you visual your retirement future based upon lifestyle factors as well as the numbers.  The workshop also promotes retirement planning and, as expected but done in a soft sell way, contacting your BMO representative.  As I stated above, I was glad I attended and did learn something ….. Lane@lifepast50.ca

As a result of another survey, this time commissioned by the CIBC (Canadian Imperial Bank of Commerce) and conducted by Harris/Decima, reveals that 70% of Ontario residents plan to continue working in retirement.  This includes activities such as starting their own business, consulting, or taking on part time hours.  Overall the poll shows that people of all ages across Canada plan to continue some for of work in retirement.  This repeats findings uncovered from other surveys so we shouldn’t be surprise by these results.

More highlights of the Ontario residents retirement results include:

• 45% believe they will work part time
• 21% believe they will do occasional consulting
• 8% say they will start a new business
• 9% say they will continue working full time
• 1% plan to spend their retirement travelling

Similar results appeared nationally across all age groups and across regions:

• 80% aged 18 to 24 believe they will work in retirement
• 65% aged 25 to 34 believe they will work in retirement
• 69% aged 35 to 44 believe they will work in retirement
• 68% aged 45 to 54 believe they will work in retirement
• 73% aged 55 to 64 believe they will work in retirement
• Atlantic – 60% plan to continue working into retirement
• Quebec – 61% plan to continue working into retirement
• Ontario – 70% plan to continue working into retirement
• Manitoba / Saskatchewan – 73% plan to continue working into retirement
• Alberta – 78% plan to continue working into retirement
• British Columbia – 80% plan to continue working into retirement

One conclusion to draw from this is that many Canadians are making a conscious choice to keep working in some form or other.  As you combine this survey with other survey results noted in other lifepast50 posts and general data about our boomer lives, we are living longer, entering our senior years in relatively good health, and we understand the importance of keeping our minds engaged.

Given the survey was commissioned by a large Canadian bank, their obvious goal is to focus the bank’s service offerings towards retirement planning and related services, not only for the boomer part of the population but also for younger Canadians.  We all understand that some planning needs to be undertaken in order for individuals to fully comprehend what lies ahead as we age.

This survey was conducted in early September 2011 and involved 1116 working and 683 retired Canadians.

An article published in the Ottawa Citizen on Sept. 13th entitled “Low Savings Forcing Retirement Delays” indicates that Canadians are putting off retirement because they aren’t saving enough and the majority are living paycheque to paycheque.  These findings are based upon a recent survey by the Canadian Payroll Association, their 3rd annual survey on these topics.  They surveyed 2070 employed Canadians between July 6 and August 2, 2011.

These findings shouldn’t be a surprise, given other similar findings described in related past lifepast50 posts.  The results continue to show that a majority of Canadians are not adequately ensuring that they are in good financial shape for today and for their retirement in the future.  Combine this with today’s uncertainty of economic recovery and Canadian demographics, and the potential exists for many Canadians to be working longer into their senior years.

Some of the survey findings:

• 57% say they would be in financial trouble if their pay was delayed by just 1 week.  Most financial planners recommend that you have an emergency fund to cover 3 months of essential expenses.
• 40% expect to postpone their retirement due to lack of savings – not saving enough for retirement.
• 74% saved less than a quarter of the money they expect to need to retire with 71% of the respondents being over the age of 35.  The bulk of savings usually occurs between the ages of 35 and 54.
• 63% feel they will need to set aside more than $750,000 to retire comfortably.  The majority also indicated they need to do more to improve savings.
• 50% were putting away 5% or less of their net pay.  Financial planners generally recommend putting aside 10% of each paycheque.
• 22% had paying off credit card debt as their #1 priority.  Based upon recent data from TransUnion, Canadian are carrying an average non-mortgage debt of $25,603.

The survey indicated the recession and the slow recovery have impacted Canadian employees.  The survey indicated respondents have modest expectations regarding pay increases and economic improvements.

Here is a link to the Canadian Payroll Association website for survey results – Survey Results.

An article published in the Ottawa Citizen by J. Chevreau (from the Financial Post) on Thursday January 27^th, highlights some interesting aspects of RRSPs and RRIFs that I wasn’t fully aware of.  The article calls these the “dark side” of RRSPs.

We shouldn’t be surprised by the fact that tax is owed when RRSPs are deregistered and converted to RRIFs.  The details surrounding this probably aren’t as well known.  The RRIF forced withdrawals are phased in at 7.48% at age 72 and increase to 20% at age 94.

As markets recover after the recessions of the 1^st decade of the 21^st century, and as more boomers approach retirement, the taxes owed are being looked at more seriously.  That money will be taxed at one’s marginal rate.  Should you be fortunate to have a large RRSP and consequently large withdrawals as a result of a RRIF, your tax bill could be significant.  Your tax deferred gains which you may have enjoyed earlier now may come back to unexpectedly hit you.  Current RRSP rules may force you to take out more than you need to spend to enjoy a comfortable lifestyle.  In some cases, if one spouse dies, the surviving spouse then has the total RRIF value of both spouses to deal with – a larger tax liability.

Some will argue the benefits of growing money in a tax deferred plan over many years outweighs the disadvantages.  Additionally, those that re-invested taxes saved as a result of their RRSP contributions, have most likely benefited even more than the tax liability that remains once it is converted to a RRIF.

TSFAs may be a rescue option for some seniors with large RRIFs.  Putting $10,000 of RRIF income into a TSFA per senior couple could grow to $200,000 in 20 years and be completely tax free.  Of course you need to live long enough to realize this advantage.

Other strategies exist if you retire early (before age 65) including RRSP early withdrawal with tax paid at a lower marginal rate in advance of receiving other retirement benefits once you turn 65.  This might be a benefit if you can stay below the Old Age Security claw back level once you turn 65.  In other cases, putting stocks in non-registered plans may make sense since only 50% of capital gains is taxed.  A long term buy and hold investment plan means no tax is paid until you sell and take the profits.  If you had losses in other securities, those can offset taxes on gains.

This all points to the fact that the Canadian federal government needs to examine the RRIF withdrawal rules given rising life expectancies.  Combine that with today’s and recent year’s small investment returns and it may be time to get some action on this point.  As the new boomers turn 65, with waves to follow, it won’t be long before a serious segment of the Canadian population nears 71 when the RRIF rules kick in.  Some tax surprises may be forthcoming.

I've concluded that the objectives of the Financial Industry is to make your money – theirs!  Perhaps a bit harsh but the following article on Blue Chip GICs shows that you can't make much on low risk instruments but those who sell you these instruments can.

Tony Amonte – enjoy the article

They want to gorge on pizza and chocolate cake, and still lose weight. They want to drive an SUV, and still get good gas mileage. And when it comes to investing, they want to take minimal risk and still get big returns.

Sorry, folks, doesn’t work that way.

This thought crossed my mind as I read a press release from Bank of Montreal touting a new “market-linked” guaranteed investment certificate that offers “the potential for bigger gains with the same safety net attached.”

Hey, sounds good, right? We could all use bigger gains with no extra risk.

So this week, we’re going to lift the hood on this product – officially called the BMO Blue Chip GIC. We’re going to delve into the arcane terms and conditions that investors need to understand before they sign on the dotted line. Then we’re going to show you why this product – and similar ones offered by other financial institutions – are a great deal for the bank, but a lousy deal for you.

The Sell

Buying the BMO Blue Chip GIC is a bit like spinning a roulette wheel where you can only win – or so it seems. The GIC has a guaranteed minimum return of 0.2 per cent over its one-year term. That’s the worst case.

The best case is that investors can earn up to an additional four percentage points – the “variable return” – for a total of 4.2 per cent. That seems pretty good considering most one-year GICs are yielding less than half of that.

But as we’ll see, this roulette wheel favours certain outcomes over others.

The Variable Return

The GIC’s variable rate of return – that is, the premium over and above the guaranteed 0.2 per cent – is determined by the performance of a “reference portfolio” of 10 blue-chip stocks: Power Corp. of Canada, Goldcorp Inc., SNC-Lavalin Group Inc., Thomson Reuters Corp., Fortis Inc., Toronto-Dominion Bank, Rogers Communications Inc., Brookfield Properties Corp., TransCanada Corp. and Canadian Natural Resources Ltd.

These are stocks that any investor would be proud to own, except that if you buy the BMO Blue Chip GIC, you don’t actually own the stocks. Nor do you collect the dividends. The stocks are merely used as a “reference” for calculating the variable return.

Problem is, the formula the bank uses to calculate the variable return is complex and heavily tilted in its favour.

The Formula

For starters, if a stock in the portfolio posts a positive return – regardless of how big – the “effective return” of that stock is deemed to be 4 per cent. That’s great if the stock rises 1 or 2 per cent, because the “effective return” will be boosted to 4 per cent. The bad news? If a stock soars 50 or 100 per cent, the “effective return” is still 4 per cent.

In other words, any big gainers will have little impact on the portfolio. Making matters worse, dividends are not included in the return calculation. In the real world, of course, dividends matter a great deal. Here, they are conveniently ignored.

It Gets Worse

Now, let’s look at how losses are treated. If a stock drops by between zero and 10 per cent, the “effective return” is the same as the actual loss. Only when a stock drops by more than 10 per cent is the “effective return” capped at negative 10 per cent. The bottom line here is that the formula is asymmetrical: Stocks that plunge have more influence than those that soar.

We’re Almost There

Now we come to the final step: Determining the variable return of the GIC.

The variable return is calculated as the average of the “effective returns” of the stocks in the reference portfolio. In other words, add up the “effective returns,” divide by 10, and that’s your variable return.

Now think about the implications here: Because of the way the formula is constructed, the only way to achieve the maximum variable return of 4 per cent is for all 10 stocks to rise. If just one or two stocks fall, the variable return will shrink, possibly a lot.

To use a baseball analogy, even if you hit a bunch of home runs, a few strikeouts could quickly wipe out your gains.

Let’s illustrate this. Imagine a scenario where seven of the 10 stocks rise by 100 per cent each, and the others fall by 8, 10 and 15 per cent, respectively. If this were a real portfolio – assuming equal investments in each stock – the return would be a juicy 67 per cent. Plus, the investor would get the dividends, which would add nearly three percentage points in yield.

Now, care to guess what the Blue Chip GIC would return under identical circumstances? 3 per cent? 2 per cent? 1 per cent? Nope. The minimum 0.2 per cent. Worse, after inflation, you’d be losing money.(If you’re wondering about the math, the seven winning stocks would generate a total “effective return” of 28 per cent. Subtract the three losses of 8 per cent, 10 per cent and 15 per cent – capped at 10 per cent – and you’d be left with a variable return of zero.)

So Much for Safety

What if markets collapse, you ask? Won’t it be better to make 0.2 per cent instead of losing 20 or 30 per cent? Absolutely. But if you want safety, you could put a portion of your money in a one-year GIC paying 1.75 per cent (or more if you lock in for a longer period). That’s a lot better than 0.2 per cent, and it’s both predictable and guaranteed.

With some of your money locked up safely, you could invest another chunk of your capital directly in blue-chip stocks or in a low-cost index fund. That way, if the stock market rises, you would actually get market-like returns – including dividends – instead of an “effective return” based on a lop-sided formula.

For its part, the bank says the product, which matures one year from its issue date of Dec. 8, has met with strong consumer response.

“We talk to our customers regularly and overwhelmingly they have told us they feel the product effectively balances their objectives of growth and protection at a fair price,” Martin Nel, vice-president of personal lending and investment products at Bank of Montreal, said in an e-mail.

“We’ve priced this product to do well in the marketplace. … It’s the right product for the times for those looking for a potentially higher return than a traditional GIC without risking principal.”

Running the Numbers

But BMO’s own performance data are less than flattering.

The bank generated a series of hypothetical results for the product, assuming it had been issued at monthly intervals between October, 2006, and September, 2009. Result: In 69.4 per cent of cases, the GIC would have returned a paltry 0.2 to 1.2 per cent. In just 5.6 per cent of cases, the return would have ranged from 3.2 per cent to the maximum 4.2 per cent.

This is a safe investment alright – for the bank.

The lesson here is clear: If you want market-like returns, you have to accept market-like risk. And if you want safety, there are better ways to achieve it.

This article was written by John Heinzl and published in The Globe and Mail on Dec 7, 2010.

A Canadian based study was conducted by three University of Waterloo researchers, entitled “Basic Living Expenses for the Canadian Elderly”, to determine the basic living expenses required by Canadian seniors living in different circumstances in terms of age, gender, city of residence, household size, home ownership / renter, means of transportation, and health status.  It assesses the minimum level of income required in retirement and the adequacy of savings and income security programs.  Using Halifax, Montreal, Toronto, Calgary and Vancouver as base urban centres, the study looks at identifying what the elderly income threshold is for these urban areas for an single elderly individual and an elderly couple for 2001.

The paper’s conclusions suggest that individual circumstances, rather than age, are the primary drivers in determining the cost of basic expenses.  The thresholds resulting from the study provide a general impression of the necessary after tax income needed to cover basic needs.

A no frills retirement – couple rents rather than owns, owns no vehicles but uses public transit, low clothing expenditures, and has very little or no extra cash for minor indulgences (like cable, alcohol and entertainment) – would have an annual cost of between $20,200 to $27,400.  Some comfort is out there for those concerned about those annual cost numbers because the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) programs for low income seniors gets close to covering these basic needs – just barely or very close depending on the city you live in.  If you add the Canada Pension Plan (CPP) payouts, if you worked most of your life, you will get more – a bit less than $30,000.

I’m sure most would look at a no frills lifestyle and cringe but there will be income.  Most Canadians want better than the no frills version and expect the same or similar levels of comfort they enjoyed while working.

Another article that discusses the noted study presents some info regarding how much income to you need.  It assumes you receive about $30,000 from CPP and OAS as a base.  For a more active lifestyle than the no frills lifestyle described above, an extra $10,000 to $30,000 a year would be needed.  Some financial planning research suggests you need retirement savings of 25 times your annual retirement spend (excluding CPP and OAS) if you want to keep spending that much for the rest of your life.  Statistics Canada indicates that median spending by a couple over 65 is about $40,000 a year and average spending is about $51,000 per year.  At the $10,000 value that would mean a nest egg of $250,000.  A higher end lifestyle, at the $30,000 value, would mean a nest egg of $750,000.  If you want to be a big spender with an extra $100,000 a year of disposable income, your nest egg would have to be $2.5 million.

This all goes to show that you need to match wants to means – find a retirement lifestyle that fits your budget.  A more lavish lifestyle will be supported by an appropriately sized nest egg.  For many, going back to work part time can provide additional cash for extra lifestyle improvements.  Ideally finding part time work doing something you enjoy so you would love the work as well the extra money.

Refer to http://ideas.repec.org/p/mcm/sedapp/240.html to download a copy of the study.  Information from one of the authors can be found at http://www.naylornetwork.com/cia-nwl/articles/?aid=31031&projid=2080.

Refer to http://ca.finance.yahoo.com/retirement/article/moneysense/42/retirement-three-magic-numbers for an article about the study plus additional related data.

A recent article published  in the Ottawa Citizen (Saturday, May 1, 2010) by J. Chevreau (Wealthy Boomer) entitled “If you’re in debt, forget retirement” highlighted information worth considering as you look towards defining a retirement life you can afford.

The article highlights the results of 2 new surveys – one from Investors Group Inc. and the other from the Royal Bank of Canada.  These surveys indicated that Canadians intend to carry significant amounts of debt into retirements.  The 1st survey indicate 62% plan to carry debt such as a mortgage into their retirement.  The 2nd survey indicated 39% of Boomers 50+ entered retirement with some debt.

Previously the standard was to enter into retirement debt free but some now feel carrying debt in retirement is not necessarily bad.  A more relaxed attitude regarding debt seems to exist.  This may be due to a number of factors including delayed parenthood for the current boomer generation, family situations (divorce, remarriage, older children still living at home, etc.), and current low interest rates.  The article goes on to talk about deductable and non-deductible debt.  All appear to agree that getting rid of non-deductible debt is important point to stress when considering how ready you are for retirement.  Various views exist regarding deductible debt based upon the fact that this is more of an advantage to those in higher tax brackets.  There are numerous tax advantages.

Another item of note in the article was from an actuary (Malcolm Hamilton).  He is quoted in the article and states that retirees can get by on just 50% of their working incomes, assuming a paid-for home.  He also indicates that if you’re still in debt, you have no business retiring and it is almost always a symptom of poor planning.  Boomers with safe investments (like bonds, etc. which currently generate little or no return) and debt should consider clearing the debt.

A recent article published in the Ottawa Citizen on January 14, 2010 stated that Canada’s greying population could push federal finances into chronic deficit.  The article also indicates that the Parliamentary Budget Officer is asking the government to set targets now on how the government will climb back to balanced budgets in the 5 year time frame.

The newspaper article is based upon information from the Office of the Parliamentary Budget Officer (PBO) published in a document called “Estimating Potential GDP and the Government’s Structural Budget Balance” -published by the PBO on January 13, 2010.  Find the whole article at this web link – http://www2.parl.gc.ca/Sites/PBO-DPB/documents/Potential_CABB_EN.pdf 

For those that aren’t familiar with the PBO, it provides independent analysis to the Senate and the House of Commons on the state of Canada’s finances, government estimates and trends in the national economy.

The PBO report noted is one of many Technical Note’s from the PBO detailing the Officer’s approach to estimating Canada’s potential GDP, potential GDI, and the Governments structural budgetary balance.

Of interest to Boomers are the PBO’s points that the projected decline in potential GDP growth is a function of the projected decline in the growth of trend labour input, which reflects slower growth of the working age population and a decline in the trend employment rate associated with the shifting age composition of the workforce.  This reduction in potential GDP growth will constrain the pace of government revenue growth going forward.  What this is saying is basically this – Canada’s labour force is expected to shrink as Boomers retire and as a result, with a smaller proportion of Canada’s population working, Canada’s economic potential will fall to lower levels.  The newspaper article notes that these lower levels of economic potential haven’t been seen in 40 years.

In a nutshell, a reduced workforce means less revenue for the government which in turn means a larger “structural deficit” in the near future.  A structural deficit represents the difference between what the government takes in revenues and what it spends.  Based upon Canada’s aging population, more and more Canadians will move from the “those who pay taxes” category to the “those who use taxes” category.  As Boomers retire, they move from paying taxes to consuming government services, everything from Medicare to old age security.

We are all aware of Canada’s aging population statistics as noted in other articles posted in lifepast50.  As Boomers, we also should be concerned about Canada’s shrinking economic growth potential as a result of the aging Canadian population.  Will this mean greater taxes in the future, a reduction in government services, government program cuts, and/or continued budget deficits?  Should Boomers be considering continuing with working part time before completely and fully retiring from the workforce (a trend noted in a previous lifepast50 posts) given the recent economic downturn?  These are things Boomers need to keep an eye on in the next 5 years as Canada moves out of the latest economic downturn.

Many of us are relying on our company pensions to finance retirement – in many cases to substantially fund that retirement.  Don’t count on it!   We are now witnessing an unprecedented pension crisis as companies go bankrupt and others struggle to survive.  And, its going to get worse!

The Globe and Mail is running a series of articles beginning with the Saturday October 17, 2009 edition looking at Canada’s pension crisis.  Those Canadians relying on pension income from our current or past employers should be paying attention.  Many examples are presented of companies in bankruptcy whose pensions have been slashed 30% or more.  Recent auto company (GM and Chrysler) failures together with other high profile organizations such as Air Canada and Nortel highlight the problem.  Those corporate plans left standing  face unprecedented stresses.  Markets in which pension funds are invested are in turmoil and have left a $50 billion hole in Canada’s corporate pension funds.

If you’re a retired or still an active public servant, you’re fairly safe.  Most public service pension plans are gold-plated, designed to guarantee a fixed income.  And, of course, the taxpayers of Canada are on the hook for those pensions including those taxpayers whose corporate pension plans have melted down.

The solutions are varied but don’t even think about getting help from Government who don’t seem to be able to fix the flaws in provincial pension regimes.  Governments appear to be sitting on the sidelines – watching as the fate of retired workers is decided in bankruptcy courts.  I’m thinking the only people that are going to come out ahead are the lawyers.

So what are our options?  If you’re not yet retired, plan on increasing your retirement savings or simply plan to work longer.  Yikes!  Some solution eh!  If already retired, some are either going back to work or turning their hobbies into income generators.  No, your small marijuana gro-op doesn’t count as it’s probably illegal.  And finally, plan on simply spending less  or selling some possesions such as cottages or homes to pay the bills.

Tony Almonte, Oct 17, 2009