How Much Money Is Enough?

The changes to the CPP agreed upon this week by eight of Canada’s Finance Ministers (Quebec and Manitoba have not yet agreed), will help Canadians contemplate how much is enough for their retirement. To answer this question, it is important to first reflect on longevity statistics in Canada and, second, on the amount of money required for adequate income in retirement.

For the recent Distinguished Advisor Workshops, Knowledge Bureau’s research team prepared a series of facts to assist advisors with tax-efficient retirement income planning for their clients. The assumption made for these plans was that the average retirement age would remain at 65, even as Canadians are living longer than ever before. Therefore, the average Boomer retirement planning period is 17 years, using the average projected terminal age of 82; for Gen X and Millennials, the plan will be longer: an average of 21 years.

In terms of retirement readiness, there is good news. According to a financial survey of 12,000 households (9000 working and 3000 retired) by McKinsey & Company in 2015, 83% of Canadians will be able to maintain their standard of living after work, based on spending 65% of their work income in retirement.

People Who Will Meet Spending Needs In Retirement:

However, according to the following excerpt from Knowledge Bureau’s Portfolio Risk Management in Retirement Course, client expectations must be managed by advisors with objective-based planning and financial number crunching:

“The challenge today is that our standard of living and life expectancy are a lot better than they were just 50 years ago. How is living longer—being able to consume more, essentially enjoying life—a challenge or problem for our profession?

For financial planners and wealth managers, this expanding life expectancy has become the largest concern for our client base. Due to enhancements primarily in healthcare, public policies and social norms, life expectancies have increased dramatically just in the past century.

In an article by Jake Edmiston of the National Post, the following appeared¹ :

“In the year 1900, the average Canadian life expectancy was just 50 years old. Today, slightly more than a century later, average life expectancy stands at 81, an astonishing 62% increase. On average, for each passing year of the 20th century, medical science and social norms added an extra 100 days to the Canadian lifespan. What this means, of course, is that Canada is home to millions of people who, if they had been born just a few decades sooner, would be dead.”

The end result is that we may be living longer but our expectations for our retirement, how and how much we put aside to fund our end objectives, or both, must change . . . the real crux of the situation happens to be the cyclical nature of the markets and the growing reliance of retail investors on those markets to aid in growing their retirement funding vehicles. More pressing, especially on the heels of the credit bubble of 2007-09, is that as tradable securities increasingly make up higher proportions of a client’s retirement fund, these portfolios bear higher levels of volatility. Compounding the higher volatility is the longer period of time that an average Canadian needs to rely on their nest egg to successfully fund their retirement years.

More clearly, if we believe that our markets rise and fall with the expected increases and decreases in the general business cycle, and if we believe that the business cycle plays out over a 5-7 year time period, we now face an added variable of uncertainty that never had to be addressed only a generation ago.”

This is what makes tax-efficient retirement income planning so important in Canada today.

Following a Real Wealth Management™ approach to financial decision-making can help with retirement income readiness, because it focuses on significant factors that are controllable over time. The goal is to ensure that retirement income produced from investments has purchasing power when the family needs it in the future.

This puts an emphasis on the management of key risks to capital. To execute on a tax-efficient retirement requires one strategic plan that all the stakeholders work towards on a consistent basis to achieve their goals.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

¹Jake Edmiston, National Post, Article: “Dead men walking: Under 19th-century conditions, millions of Canadians would already be dead,” October 26, 2013, URL: http://news.nationalpost.com/news/canada/dead-men-walking-under-19th-century-conditions-millions-of-canadians-would-already-be-dead

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