Canadians Worry They Won’t Have Enough Income In Retirement
Many Canadians admit that they are not sure they will have enough money in their retirement.
A recent study asked respondents what percentage of their savings they think they can afford to withdraw every year. Only about one third appeared to have realistic spending expectations.
One of the difficulties in this calculation is that we don’t know how long we will live, so we don’t know how many years the money needs to last.
It is important NOT to use average life expectancy when doing your planning. Remember that if the average life expectancy of a 65 year old man is age 84, HALF of men will live longer than 84. You have a 50% chance of being wrong – not encouraging odds. For a couple aged 65, there is a 40% chance that one of them will live into their 90’s.
Safe withdrawal levels for a retirement that may last 20 or even 30+ years are in the area of 4 to 5%. Alarmingly, close to 20% of respondents thought that they could withdraw up to 20% from their savings annually. Knowing how much you can spend is as important as saving for retirement in the first place.
While Canada Pension Plan (CPP) and Old Age Security (OAS) do provide life-long income – the amounts are not large. The average Canadian CPP income in 2011 is $512 a month, (though the maximum amount is $960 per month). The maximum OAS is currently $537 a month.
There are some other types of insurance based plans that can also provide you with income for life – either Annuities or Variable Annuities. Insurance companies can provide a guaranteed income stream for individuals or couples, similar to a defined benefit pension plan. These plans may be a good option for part of a retirement nest egg -particularly those who want the comfort of knowing that there will be a set amount of monthly or annual income for as long as they live, regardless of markets or interest rates. And there are advantages to setting up a variable annuity plan while you are still up to 10 or 15 years away from retirement as the plans offer bonuses for years where you are not drawing any income out.
The risks that we face in planning retirement include:
- Longevity Risk – the number of years we will need the money to last. Life spans have been increasing.
- Market Risk – how the markets and interest rates perform
- Sequence of Return Risk – how the markets perform in the few years before retirement and for the few years just after retirement will have a must larger effect on how a portfolio fares. Downward results will have much more severe negative results. Upward results will have increase positive results. There are ways to minimize risk of the “luck factor”
- Inflation Risk – the longer the retirement the more even relatively small rates of inflation will erode purchasing power
- Health care costs – even in Canada there are significant costs that are not fully covered by the government – such as room and board in facility care and health care support in your home
- Reductions to your income while saving for retirement – such as an accident, injury or illness. Having adequate insurance to protect your income during these critical years will protect your future income.
Your future will one day be your present – by doing some planning work in advance you have the opportunity to shape what your retirement and retirement finances will look like.
Diane Penney, EPC
November 2011