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By Rob Carrick
The Globe and Mail
Report on Business
Saturday, October 29, 2005 |
Millions of Canadians, including the self-employed, have no company pension plan. If you're one of them, it's a burden you can overcome, ROB CARRICK writes.
Choose one of the following options if you're part of the unfortunate majority of Canadian workers who are without a pension:
(A) Retire later than your pensioned fellow workers.
(B) Contribute more to your retirement savings plan.
(C) Scale back your spending in retirement.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "The first step is to discuss the age at which a client wants to retire and the amount of income he or she hopes to achieve.”
Let's face it, a company pension is the greatest employment perk going because it gives you a solid foundation on which to build your retirement savings. Without a pension, you'll have to work a lot harder to ensure a financially comfortable retirement.
"It's certainly a disadvantage if you don't have a pension, but if you've done some planning or investing and saving, it's not insurmountable," says Debbie Ammeter in Winnipeg.
Statistics Canada figures show that there were 5.5 million Canadian workers who had pension plans in the first quarter of the year. With more and more self-employed people in the work force, the number of individuals without pensions was more than double that number. One thing they all have in common is a tendency to leave serious retirement planning until they reach anywhere from age 45 to 50.
"Most people start the big push after age 45," says Adrian Mastracci, a financial adviser and president of KCM Wealth Management Inc. in Vancouver. "I've got some clients in their 30s, but they're unusual."
Advisers like Mr. Mastracci have a series of steps they go through in helping clients plan for retirement, and they apply to people who do or don't have pensions. But the process is all the more important for those who lack pensions because they have only the Canada Pension Plan and Old Age Security to depend on, as well as their own savings.
For Mr. Mastracci, the first step is to discuss the age at which a client wants to retire and the amount of income he or she hopes to achieve. He'll also talk about an expected lifespan, and then add five years to whatever age is mentioned, just to be conservative.
How do you know how much income you'll need in retirement?
Many financial advisers talk about a "replacement ratio," which is the percentage of your final salary in the work force that you'll need once you're no longer employed.
Mr. Mastracci says he prefers to have clients list the expenses they expect to incur in retirement and then project the amount of income needed to cover the costs as well as taxes and inflation. "I'm closer to the truth by replacing expenses."
Fortunately, the expenses you'll face in retirement will be lower than in your middle working years because your mortgage will, in all likelihood, be paid off and your children will have moved out.
All financial advisers have software these days that takes a client's retirement age, savings goal and lifespan and then spits out what level of savings will be required to meet these objectives based on various investment returns.
Next step: Mind the gap between what an individual has already saved and how much they'll need to save in total.
It's there that the individual without a pension is at a true disadvantage.
With a solid pension, some comparatively modest saving in an RRSP might be enough to help someone retire when they want and with a generous income.
Without a pension, people may have to look at retiring later, ramping up their retirement savings or making do with less in income after they're out of the work force.
A surprisingly effective solution if you're a non-pensioned worker with a retirement savings shortfall is to stay on the job longer, whether it be full time or part time.
"Even working a few more years can make a huge difference," Ms. Ammeter says. "You'll be able to put more away during those years and you're shrinking the number of years you have to finance in retirement."
People are living longer, more active lives today, which means a retirement lasting 20 to 25 years isn't unusual. In that light, keeping busy by working past age 65 is growing in appeal. "A lot of people seem to be more inclined to say, 'Yes, I think I will be interested in working maybe part time after I retire,' " Ms. Ammeter says.
It's easy to say that saving more is an option for non-pensioned individuals, but the reality is that families have to juggle dozens of legitimate spending demands these days in addition to retirement savings. A solution is for people to shovel increasing amounts of money into their RRSPs when their mortgages are paid off and their children have left home.
Unused RRSP contribution room dating back to 1991 can be backfilled at any time, but earlier is better than later because your contributions have more time to compound tax-free. Some advisers suggest using an RRSP catch-up loan to exploit unused contribution room, but there are those who disagree because the interest is not tax-deductible.
Cynthia Kett, in Toronto, says that money spent on RRSP loan interest would be better used as a contribution to the plan. "To me, it just doesn't make sense to be paying non-deductible interest."
The final option for ensuring you can meet your retirement needs without a pension is to look at ways of spending less when you leave the work force.
"People are always asking us, 'How much is it going to cost me to retire?' " Ms. Kett says. "And the answer is, 'It depends. What are your retirement expectations?' "
To a large extent, your retirement income needs will be dictated by the expenses that Mr. Mastracci focuses on.
But there are also discretionary areas where you can trim your costs. For example, you could move to a smaller home or condominium, where upkeep costs and property taxes are lower.
There are lots of free on-line tools available on the Internet for developing a retirement savings strategy (just do a search on Google), but Ms. Ammeter argues that it's worthwhile getting the help of a financial adviser.
"If someone has been investing and saving in an RRSP because they don't have a pension, they may be in a very good position," she says. "But they should still get someone to help them assess their resources."
Retiring without a safety net
Here are some tips for people in the late 40s or early 50s who are starting to plan for retirement without the benefit of a company pension plan:
- Find out how much unused RRSP contribution room you have by checking the notice of assessment that the Canada Revenue Agency sent after your most recent tax filing.
- Direct excess cash into your RRSP as mortgage and child-related expenses taper off.
- Set your desired retirement income by projecting your expenses and lifestyle; trim where necessary to bring your savings in line with your needs.
- Consider working past 65 on a part- or full-time basis to further build your retirement savings and postpone withdrawals.
- Use reasonable assumptions for investing gains, not idealized returns in double figures.
- Don't forget that the Canada Pension Plan and Old Age Security offer a small but useful level of income.
- If you're looking after your own retirement savings, consider using a financial adviser to ensure you're on the right track.
- Don't panic about neglecting your retirement planning -- advisers say it's typical to leave things until age 50 or so.
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