Canadians are living longer than ever. But longer lifespans are placing a greater responsibility on individuals to manage ever lengthening retirements. According to Statistics Canada seniors accounted for more than 16 per cent of the population in 2015, with that number predicted to rise to 25 per cent by 2055, a future in which more retirees compete for finite government resources.
“Globally, the responsibility for pension outcomes is transferring to the individual,” says Chip Castille, head of global retirement strategy for BlackRock. “Recognizing that responsibility is the first step to create an effective retirement strategy and deciding what your retirement goals should be.”
While retirement may mean extensive travel to some or simply enjoying family to others, there’s a common thread that unites all successful retirement plans — creating a stream of income that will allow someone to sustain a consistent lifestyle throughout their retirement years.
However, retirement plans often suffer from three common miscalculations that can easily be corrected — the earlier the better.
Underestimating life expectancy
“People underestimate how long they’re going to live,” says Castille. “Life expectancy figures estimate an average lifespan from birth. But if your statistical life expectancy is 76 at birth, by the time you’re 65 you’ve already survived childhood diseases and reckless adolescence and your life expectancy has already risen to mid-80s.”
Overestimating retirement income
Second, people overestimate how long their money will last, adding to the financial challenges of a longer-than-expected lifespan.BlackRock’s 2015 Global Investor Pulse Survey estimates that, on average, Canadians expect to require $46,900 annually to satisfy their anticipated expenses in retirement. However, they’ve only saved an average of $70,700 in total — enough to maintain that lifestyle for two years, excluding any government pensions.In fact, four in 10 Canadian pre-retirees have saved absolutely nothing for retirement, according to the BlackRock survey, presumably counting on government pensions to meet future needs.The Finances in Retirement Index, published by Natixis Global Asset Management and CoreData Research, assesses the suitability of countries in meeting the financial needs and expectations of retirees. Canadians ranked 11th out of 150 countries with a rating of 68, only slightly better than the U.S. index score of 65.
Underappreciating the power of compound interest
“Third, people don’t understand the power of compound interest, which is an exponential process,” says Castille. “It’s like the analogy of placing a grain of rice on a checkerboard and doubling that amount for each subsequent square. People can guess the amounts for the first few squares, but they tend to underestimate how many grains of rice there are when it comes to the whole board.”
After realistically assessing all three considerations, Castille recommends developing an appropriate retirement plan.”In order to achieve a consistent lifestyle in retirement, we can look at models that help us to estimate how much of our income we need to devote to saving and investing,” says Castille. “Most people aren’t on an income roller coaster, doing splendidly one year and impoverished the next. Generally we’re earning a relatively larger amount at the end of our careers than at the beginning. When you’re young it may be more important to consume instead of saving, or you’d be eating nothing but ramen noodles. But as you reach your 30s and are receiving regular pay increases, you can really begin to invest and build balances quickly, leveraging the principle of compound interest.”
Castille recommends that pre-retirees look at retirement investment as a debt they owe their future selves. For example, he advises people to look at the money a person would need to put aside to enjoy a cup of coffee each day of a 30-year retirement. At $1.95 per cup, it would cost $21,352.50.
“As an illustration, imagine you’re 55 and you want to enjoy that cup a day for 30 years, beginning at age 65,” says Castille. “You can achieve that goal, based on certain investment assumptions, by putting aside just $9,701.00 today — which is quite a bargain.”
While some Canadians are relying on cash savings to help them through retirement, Castille notes that cash represents a false sense of security. While cash may feel safe, historically low interest rates won’t buy the retirement lifestyle many imagine.”Even in a period of volatile markets its important to identify your tolerance for risk and adjust your retirement portfolio around that,” he says. “Often people seek the advice of an investment professional to identify the point where their investments allow them to sleep well tonight and eat well in the future. That future cranky senior that you might one day become will thank you for it.
Published 18 February 2016