By Paul Delean
Montreal Gazette
Monday, January 09, 2006
For the most part, Canadian baby boomers have had it good for most of their working lives.
How good they'll have it in retirement is another question, one that too few of them have considered seriously as the first of their ilk turn 60 this year.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Most of my retired clients actually stay in their homes rather than sell and downsize.”
With life expectancies growing and returns from guaranteed investments near historic lows, many people run the risk of depleting their savings well before they draw their last breath.
Government benefits and the Canada Pension Plan alone will not be sufficient to maintain the lifestyle they've come to know, especially if spiralling health-care costs become a growing financial burden.
A recent telephone survey of Canadian investors conducted for TD Waterhouse found less than half of the 1,000 respondents polled had gone through the exercise of actually estimating the amount they believe they'll need to retire.
And that sampling was restricted to people who actually own investment products inside or outside an RRSP. The proportion in the general population figures to be significantly lower.
People are always amazed, when they do the math, how sizeable the savings targets are, notes adviser Adrian Mastracci of KCM Wealth Management Inc. in Vancouver.
"They are surprised about what it takes to retire these days," Mastracci said.
In the TD Waterhouse survey, people who had done the homework gave an average projection of $894,000 - 50 per cent more than the average estimate only two years earlier.
For most couples in their 40s and 50s hoping to retire around 65 with the equivalent of $50,000 in today's dollars as combined annual income (government benefits included), Mastracci's models peg the targeted retirement capital at around $1 million. The higher the desired income, the larger the sum needed.
Mastracci includes in the total the value of private pension plans, business interests, RRSPs and unregistered investments, but not the personal residence.
"Most of my retired clients actually stay in their homes rather than sell and downsize," he said. "It's an ace in the hole, if needed."
He said his nestegg projections tend to be higher than other advisers because he allows for a three percent inflation rate and adds five years to the average life expectancy to be on the safe side.
The numbers may seem daunting, but they are attainable with discipline and planning, he said.
"Unfortunately, time lost is the one element that cannot be recaptured without incurring added investment risks," he said. "Hence, the earlier the exercise starts, the better the results are likely to be."
For those who fall short in accumulating retirement reserves, and especially those who opt for early retirement, the key to making the nestegg last is not to spend too much, since money withdrawn from savings no longer contributes to annual returns.
"It is often stated that spending money in retirement is akin to creating your own pseudo bear market, since each year the withdrawal process reduces portfolio growth by the spending rate," notes Moshe Milevsky, associate professor of finance at York University, in a recent paper on retirement income.
Milevsky said a newly retired 65-year-old woman has a 94percent chance of surviving to age 70, a 56percent chance of surviving to age 85, and a 16percent chance of making it to 95.
"Their retirement horizon is random and they obviously face the longevity risk of outliving their nestegg if they live longer than anticipated," he said. "It is hard to overstate the importance of incorporating longevity risk when preparing a retirement plan."
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