Will Canadians outlive their assets?*

Increasingly, Canadians are finding a gap between “wanting” and “doing” retirement. Fear of ill health may actually keep their noses to the grindstone after normal retirement age

By Monique Tremblay

*This is an expanded version of a summary that originally appeared in the April 2005 print edition of CAmagazine.

For the past three years Desjardins Financial Security has conducted a telephone survey to evaluate Canadians’ perceptions, intentions and behaviour concerning retirement. The 2004 survey identifies five retirement trends and several other areas where financial planning can help people maintain control of their finances.

Respondents are both optimistic and pessimistic
In the 2004 survey, respondents say they are optimistic about their retirement prospects. If you look more closely at some of the statistics, however, you will notice some pessimistic attitudes toward retirement and personal finances. For example, only 19% of respondents who haven’t yet retired report being “very confident” in their ability to save for this stage of their lives. 

Trend 1 – Confidence in the system
Even workers who participate in an employer plan have some concerns. Less than half (45%) say they are “very confident” their employer will be able to pay them a pension. Respondents are even more sceptical about the federal government’s ability to pay them an annuity or a pension when the time comes – only 6% say they are “very confident” they will receive their old age pension. This is consistent across Canada and the responses are comparable with respect to the Canada or Quebec Pension Plan.

In spite of this, six out of 10 people report being confident they will be able to retire at their ideal age; many respondents still believe they will be in a position to retire at 59 years of age – six years earlier than the reference age for government programs.

Trend 2 – Progressive retirement
Progressive or phased retirement is more and more a reality. The current survey results indicate that two out of three respondents plan to retire only partially and will continue working during this period. Some of the respondents are already in that category. Although they are few in number, it is interesting to see some emerging patterns: 1) working on a continuous basis or taking intermittent periods of time off; 2) having a different job from the one prior to retirement; 3) working in a different business sector.

Trend 3 – Illness costs
Retirement planning must also take into account the impact and severity of illness. For example, in the case of critical illness or disability, seven in 10 respondents (72%) believe provincially funded healthcare services would only partially cover their needs. At the same time, not even half of the survey respondents indicated that the financial plans they prepared cover those aspects.

To pay for expenses not covered by government plans, half of the respondents would rely on their group insurance plan and 43% on their private plan. Most of the respondents who have already retired (78%) would use their personal savings, which may prove challenging since 31% of the respondents report less than $10,000 in personal savings and investments.

On the other hand, a significant proportion of Generation X and Y respondents would rely on their family and friends for financial help in the event of a critical illness or disability.

Trend 4 – Inheritance windfalls
Many baby boomers expect to receive an inheritance windfall.  For example, the survey shows almost one-third of respondent workers aged 40-plus predict they will inherit within the next 10 years. 

When asked what they would do with any inheritance, 64% of our respondents said they would invest in financial products. Almost half of them would spend the money on one or more trips. Only 43% would pay off their mortgage or fund their children’s education.

Trend 5: Transfer of risk 
Currently, public and private institutions are in the process of transferring risk and costs to Canadian consumers. In spite of the recently negotiated federal transfer payments, provincial governments will continue to struggle with significant increases in healthcare costs. Given our low birth rates (Canada has one of the lowest in the world) and our ageing population, this trend is likely to continue for some time. Moreover, as baby boomers begin to retire, changes in the ratio of retirees to workers will increasingly affect the sustainability of social security programs and social institutions. According to Statistics Canada, there were close to five workers for one retiree in 2000. The ratio will be two workers for one retiree in 2030.

Retirement planning
As assets and incomes increase, more time is put into financial planning. For example, respondent workers aged 40 or more, with a personal or group RRSP, and who have more than $100,000 in savings and investments, are more likely to have an action plan.

Whether for retirement or other projects, almost two-thirds (63%) of people in this segment of the survey have a retirement financial plan. Of course, it is easier to plan when the household income leaves room for savings.

Retirees as well (63 %) continue to plan how they will use their accumulated savings. This is a positive result as it confirms the significant trend observed in 2003 (65% vs. 54% for 2002). There are some variations by province, but the appreciation of the importance of financial planning is definitely increasing.

Respondents were asked to say who prepared their plan. Close to one-quarter (21% of workers and 28% of retirees) said they prepared this critical document themselves. About one-fifth (18% of respondents) relied on financial planners and advisers working for financial institutions to prepare the plan.

Scope of the plan
Working respondents, partially retired workers aged 40 and more as well as fully retired respondents with a specific savings accumulation plan were asked which elements were included in the plan. The table below summarizes these elements and their prevalence.

The top three answers were (1) personal savings to provide retirement income, (2) personal savings to cover unexpected events and (3) life insurance. Since people embark on a retirement savings program to provide sufficient income during this period as well as to have a cushion for unexpected events, these results are not surprising.

In contrast, there were lower proportions of insurance to cover long-term hospital care (around 46%), insurance to cover home care (around 45%) and critical illness (around 40% for retirees).

In light of these earlier comments, it is important to broaden the scope of financial plans to include scenarios to deal with existing and changing health conditions.

Elements considered in the financial plan
	Workers (n:370) %	Fully retired (n:182) %
Personal savings to provide retirement income	94	81
Personal savings to cover unexpected events	85	77
Life insurance	80	59
Personal savings to cover personal debts	72	66
Personal savings in case of health problems during retirement	71	65
Insurance in case of critical illness	67	40
Insurance to cover the cost of the funeral services	52	45
Insurance to cover long-term care in a hospital centre	50	42
Insurance to cover home care	49	39

People may be retired for 25 years or more
Due to ever-increasing life expectancies, it is not unreasonable to assume that people will be retired for the same amount of time as they were working, or even longer. In other words, it is just as likely that a person will live as a retiree for 25 or even 30 years or more.

According to current actuarial estimates, one in three couples aged 65 will have at least one person live until the ripe old age of 95. There is a strong likelihood this person is female.

Loss of autonomy, the high costs of long-term care, having to fund downloaded costs from government programs, low interest rates, and the risk of inflation all have a major impact on this segment. Consequently, financial plans must include several scenarios with various life expectancy periods and health conditions.

Majority own their property
Many of the respondents aged 40-plus and retirees own their principal residence. More than one-quarter (27%) of workers aged 40 or more contemplate selling their property to generate retirement income. On the other hand, a lesser proportion of fully retired people have actually done this or plan on doing this in the future (15%). It is reasonable to assume these respondents believe that property ownership adds to their quality of life during retirement. Interestingly, a greater proportion of self-employed workers aged 40 or more are considering converting their real estate assets into cash at retirement (40% versus 27% overall). Although real estate often represents a significant proportion of one’s assets when planning retirement, it is difficult to conclude to which extent the retirement financial plan includes all potential ingredients at this stage.

Realism emerges
Desjardins Financial Security 2004 retirement survey revealed Canadians are in many cases more realistic about how to prepare for retirement. Although they are confident about retiring at the expected age, many are still concerned about the costs of an illness or disability at retirement.  In light of the transfer of risk to consumers by governments and companies, these concerns may be justified, particularly in a context where people are living many more years in retirement. 

Monique Tremblay is the senior vice-president, savings and segregated funds, at Desjardins Financial Security. She can be reached at monique.tremblay@dfs.ca

About the survey
The 2004 retirement telephone survey was carried out from August 13 to September 7, 2004 by SOM, a firm specializing in market research and public opinion polls (http://www.som.ca/). Overall, 1671 interviews were conducted with a representative sample of Canadian adults. The sampling plan provides proportion estimates with a maximum margin of error of 2.5% at a 95% confidence level.

Related articles
2002 survey: Financial planning on the rise, by Taylor Train, CAmagazine, April 2003