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Match retirement expectations with reality by using a financial advisor

A new survey shows a gap between expectations and reality. According to Fidelity Investments Canada, the best way to plan for retirement is to work with a financial advisor

By: SIMON AVERY

Date: January 22,2015

A new survey shows a gap between expectations and reality. According to Fidelity Investments Canada, the best way to plan for retirement is to work with a financial advisor

There is a large gap between retired Canadians and the first wave of baby boomers entering retirement in thinking about where their money is going to come from.

A survey from Fidelity Investments Canada finds that most baby boomers, to meet their retirement expectations, need to take greater responsibility for their financial planning and prepare themselves for some of life’s unexpected curve balls.

“It is very important and very difficult for people to envision their retirement. Working with a financial advisor is essential and will make this task much easier,” says Peter Drake, vice-president of retirement and economic research at Fidelity Investments.

The good news is the survey paints a very positive picture of life in retirement. Overall, 85 per cent of existing Canadian retirees have a generally positive outlook on their lifestyle.

The men and women who will retire through the rest of this decade are slightly less positive, but still high at 78 per cent. They plan to rely on income from part-time work more than existing retirees. They are also more inclined to rely on their own savings than previous generations and half of them expect to tap home equity to supplement their income.

The data come from Fidelity Investments latest annual retirement survey, which polled more than 1,000 Canadians from across the country over age 45.

Almost half of Canadians approaching retirement plan to supplement their cash flow with some form of paid work. But that expectation is out of step with the thinking of those already retired, of which just 20 per cent consider employment an option, the survey found.

Once into retirement, many Canadians find that their plans for working are stymied by obstacles they didn’t expect. For example, one-third of those who want to work but don’t are hindered by poor health; almost one-quarter find employers are not interested in hiring retirees, and 12 per cent are preoccupied caring for another family member, the survey determined.

In addition, about half of Canadians end up retiring before they had planned, usually because of poor health or changes in their workplace, Mr. Drake says.

“Planning to work in retirement is not a retirement plan,” he says.

Among the other findings of the Fidelity survey, 50 per cent of Canadians approaching retirement believe that home equity will contribute to their retirement. But only 36 per cent of those already retired feel the same way.

While the housing super cycle has enriched many baby boomers, those planning for retirement could be misleading themselves if they expect their home equity to keep growing at earlier rates.

Canadian housing is approximately 20 per cent overvalued today when compared to growth in long-term economic fundamentals, says Stefan Hilts, an analyst at Fitch Ratings. He expects rising prices will begin to moderate this year and he warns that the real estate market is exposed to downside risk.

Among those surveyed by Fidelity, 58 per cent of retired Canadians said they expect to rely on income from RRSPs and RRIFs. But among baby boomers still working, two-thirds said they will need to tap personal savings.

One reason for the growing reliance on personal savings plans is that corporate pensions are on the decline. A study released in January by Statistics Canada showed that households that have workplace pension plans are on average one-third wealthier than families without. One of the agency’s conclusions was that families without pension plans “are not fully compensating for their lack of [pension] coverage through increased savings in other assets.”

Another challenge that comes with having to rely on personal savings in registered accounts is the tax burden that they can unleash.

“People don’t always understand what they are getting is tax deferral, not tax relief,” Mr. Drake says of RRSPs and RRIFs. “They also tend to underestimate their tax bracket for when they retire.”

The failure to budget and invest for retirement carries profound implications. Especially as baby boomers are likely to live longer than they think.

Indeed, in the early 1930s, a Canadian’s life expectancy at birth was about 60. By the early 1950s, that figure had shot up to 70. And for those born this decade, life expectancy at birth has topped 80, according to Statistics Canada.

This longevity can be expensive, and members of the free-spending baby boom generation face a substantial risk of outliving their capital. It’s not just their high-rolling habits that could catch up with them, but inescapable expenses.

Many baby boomers find themselves part of the “sandwich generation,” looking after both aging parents and adult children who still live at home. On top of that, all baby boomers face the possibility of expensive medical bills. Health-care spending accelerates rapidly for people once they reach their 60s, although the costs are not always a consideration in Canadians’ retirement planning.

The average public health expenditure for a Canadian aged 65 to 69 was $5,828 in 2008, about double what it was for those aged 55 to 59. By the time Canadians pass 75, spending nearly doubles again, to $10,898, according to the Canadian Health Institute for Health Information.

But these figures represent just 70 per cent of total health-care costs. The rest are paid by retirees themselves, or their insurance, Mr. Drake says.

Not surprisingly, Fidelity says the solution to this emerging financial gap is to work with a financial advisor and put savings to work in the stock market. The investment firm makes its case with some basic data.

Even with the Bank of Canada targeting for a very modest inflation rate of 2 per cent, over 25 years this would be enough to wipe out 40 per cent of your purchasing power. Specifically, $50,000 left uninvested today would be worth only $30,500 by 2040. And if inflation were to average 4 per cent over that period, purchasing power would tumble to $18,800, according to Fidelity Investment calculations.

By comparison, Canadian stocks have produced an annualized return of 9.4 per cent since 1970, based on the S&P/TSX Total Return Index. That means every dollar invested in 1970 is worth $55.43 in today’s market.

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