Are boomers destined to become doomers? Not if CAs have anything to do with it
By Taylor Train
Millions of boomers will retire in the next 20 years. While everyone expects to retire, few plan for it. For example, many retirees have less personal income, crippling personal debt and face mushrooming health care costs as they age. Add to this some very legitimate concerns that CPP and maybe even Employer Pension Plans (if people are lucky enough to have them) will be there when they are needed, and it's easy to see how retirement poverty could supplant child poverty as the no. 1 issue in the future. CAs are perhaps among the few professionals who are perfectly positioned to help Canadians negotiate these and other retirement issues.
Half of Canada's workforce is over 50
According to Statistics Canada, by 2012, half of Canada's workforce will be 55 or older; close to a quarter of them will be more than 60 years old. Graying Canadians have legitimate concerns about rising health-care costs and eroding funding for the social safety net.
In January 2003, Desjardins Financial Security retained SOM research to interview 1,000 Canadian adults. Only 24% of Canadians who have not fully retired and are under the age of 65, believe the federal government is likely to meet its obligations in the future. Quebecers have a similar lack of confidence concerning the provincial government's ability to pay QPP benefits (71%).
Desjardins' survey also found that while close to half of Canadians who are gainfully employed contribute to some form of Employer Pension Plan, fewer than half of them have faith in their employer's ability to pay benefits.
In his book 2015: After the Boom – How to Prosper Through the Coming Retirement Crisis, Garth Turner suggests that by 2015 the Canada Pension Plan will be bankrupt and the next generation swamped, as nine million Canadians retire at the same time. Facing a dwindling tax base and surging social program costs, Turner believes the Canadian government will not be there to support the boomers.
According to Statistics Canada, boomers (aged 37 to 56 in 2001) currently make up close to half our labour force. Although most will experience a drop in their personal income when they retire, only a handful have thought about how they will be able to pay for ongoing and often escalating retirement costs.
Despite their increased need for professional advice, already-retired people don't seek as much help with their finances as they did in the buildup to retirement. For example, only 16% of Canadians under 65 who have not fully retired have a very high level of confidence in setting aside enough money for this phase of life. What will the other 84% of Canadians plan to live on?
These sobering statistics become even more depressing when we look at how few savings Canadians have. Half of the people surveyed by SOM have less than $25,000 in savings. In Quebec, the numbers are even lower. Even 69% of Canadians with RRSPs have less than $50,000 in their retirement accounts.
The impending labour shortage
Some economists believe when the boomers retire, businesses will face a labour shortage of crisis proportions. Even with stepped-up immigration policies, experts predict it is too little, too late. Not only will it be tough to maintain our existing pension and social security systems with a reduced tax base; it will be challenging to find experienced staff to fill the positions vacated by the retirees.
Although close to half the Canadians surveyed by SOM were aware of impending labour shortages, this did not dampen their retirement dreams. As pointed out by the Ottawa Citizen in a February 14, 2003 article titled "Rethink retirement: Labour shortages loom due to flawed pension policies," it may behoove employers to implement workplace policies that encourage graying employees to continue working -- for example, by providing them with access to at least some pension benefits.
Another idea gaining popularity is to encourage people to gradually reduce the amount of time they work as they age (phased retirement). The Ottawa Citizen suggests this has merit because it helps maintain tax revenue and creates jobs for younger workers. It also allows companies to renew themselves while maintaining access to the experience and judgment of their veterans.
If client companies want their older workers to delay retirement, Desjardins' SOM survey finds timing is critical - only 21% of gainfully employed Canadians who are 40-plus are willing to consider postponing their retirement. Only 4% of the full-time retirees surveyed are definitely considering going back to work. Even so, the odds are against the employer, since 16% of the respondents said that regardless of how attractive the offer, they would not postpone their retirement for any reason.
A new generation of entrepreneurs
In his January 21, 2003 Financial Post article titled "Seven of 10 resigned to working in retirement," Jonathan Chevreau points out that a whopping 75% of nonretired Canadians polled by Decima Research expect "earned income" to be their main or secondary source of retirement income. This is in startling contrast to today's retirees (only 23% of whom engage in paid work).
Desjardins' SOM survey results support Chevreau's conclusions – slightly more than half of respondents aged 40-plus who are planning to retire partially at first, plan to work 20 hours a week. Although they have the technical skills to be successful entrepreneurs, many will not have business or systems savvy. There is a new generation of entrepreneurs who need your advice and guidance.
Whether they are new entrepreneurs or not, the sad reality is that few of those intending to generate earned income in their golden years have well-thought-out financial plans. It's almost as if people say to themselves: "That's it, I'm retired, I don't have to think about this anymore."
Even today, ignorance is a very big issue. For example, only a handful of retirees understand that without proper financial planning they cannot protect their loved ones after they have passed on to the final "big retirement." Then there are those who are shocked to learn that without addressing estate, insurance and health considerations, their stock or mutual fund purchase program is not a complete financial plan.
Ignorance also affects Canadians who feel safe because they participate in an employer retirement program. According to pension consultants Watson Wyatt, pension funds worldwide have lost a staggering US $2.8 trillion — 21% of their value — since 1999. As Chevreau points out, this prompted the normally cautious Economist to declare the bear has "left many companies with big pension shortfalls, which may weigh heavily on share prices for years to come."
According to Desjardins Financial Security's research, too few Canadians are adjusting their retirement plans to address the shortfall in their investment returns. Moreover, defined- contribution plans and group RRSPs do not specify how much money will be paid to the employee when they retire. This means employees must undertake some financial planning as well as make choices about how their money is invested. They have little, if any, employer assistance to do this.
Far too many Canadians run the risk of losing their hard-earned life savings because they don't understand the consequences of their financial decisions. Because of the wide range and complexity of retirement options to consider and the limited extent of generic information available they will continue to make costly mistakes they are likely to live to regret.
Many retirees are "benefit poor"
With the increased longevity of their parents, most boomers fully expect to have to pay for significant long-term health-care bills, first for their parents and ultimately for themselves and their partners. Unlike company employees, few retirees and new entrepreneurs have a company benefits package that allows them to do this.
For example, Desjardins' SOM survey confirmed that only 52% of retirees have life insurance (the number is higher in Quebec); half of the survey's respondents or a quarter of retirees have disability insurance. What happens if they have to deal with a debilitating illness after they retire?
This will become even more of an issue as the government modifies our health-care system. Without adequate insurance, they run the risk of becoming wards of the state, which will only provide limited free long-term care -- and even then, only if the person is impoverished.
This tells me individual Canadians must develop a health-care plan and begin saving, much in the same way as they do for retirement, so they can have their personal health looked after in an appropriate manner.
Retiree poverty is an emerging issue
Most Canadians have a mortgage, kids and car payments. Even with a salary of $55,000 to $60,000 they struggle to make ends meet. Health-care advances mean we (our dependents and hopefully even our parents) are living longer, which exacerbates the funding issue. Although we should, in principle, be debt-free when we enter our retirement years, this is virtually impossible for many.
As the boomers retire, research suggests many will lose about a quarter of their income. Either because they are one of the new entrepreneurs, have no marketable skills or have little or no personal savings, it will be almost impossible for many retirees to make up this shortfall. With so many more people requiring service, and fewer taxpayers to pay for it, it is also reasonable to expect the quality of government health-care to plummet.
According to my personal research, a good seniors' residence costs between $3,000 and $5,000 a month. Government-run long-term care facilities cost about $1,600 a month for a shared room and $2,100 per month for a private room. Even when CPP and Old Age Security are added together they don't cover the cost of a private room. Imagine having your first roommate at age 75!
Lifestyle challenges
Although the main challenge for retirees is related to a change in personal income, having to adapt to a change in daily activities is also an issue for some. For example, many people enter this stage of their life without thinking about whether they want to work part time, pursue a hobby, volunteer or travel frequently. These choices not only have implications for the quality of their retirement, they have a profound impact on the cost of retirement and whether Canadians have sufficient money to fund their chosen life style.
Not that long ago, planning for retirement meant investing in Canada Savings Bonds and cashing CPP cheques. Today, far too many Canadians find it impossible to even save their allowable RSP contribution amounts.
As the boomers age, there will be many more older people and retirees. Thanks to health-care advances, we're living longer, which means it will take even more money to look after us for longer periods.
Whether they like it or not, Canadians will probably be required to support themselves by making their pensions go further, by increasing their savings and/or by extending their working lives.
Only when Canadians begin to treat financial planning as a process, rather than a one-time event, can they begin to create money practices that serve them well in every stage of life. CAs are in a position to provide this crucial counsel. The problem is that many Canadians are not yet taking advantage of this advice.
Ironically, financial professionals themselves may have unwittingly contributed to this problem. When practitioners limit their practices to high net worth clients, the majority of Canadians are forced to rely on advice from "second stringers" who know only about stocks and mutual funds and little about financial and life planning.
Moreover, only 2% of Canadians earn more than $100,000 a year. The average income for a four-person family is $60,000. By focusing only on high net worth clients, financial professionals effectively eliminate 98% of their potential client base and then aggressively compete with one another for this tiny piece of the overall market. This is worth thinking about!
I believe a "high net worth only" strategy has dire consequences for far too many Canadians and challenge the financial community to modify their marketing focus before retiree poverty supplants child poverty as the issue of the future.
Sidebar
Desjardins' SOM survey also discovered some other interesting sociodemographic and financial planning information about Canadians:
- Offers from employers to promote retirement were almost nonexistent (1%) during the past year among gainfully employed workers over the age of 40.
- Support from employers to help people plan their retirement is a possibility for more than 40% of workers 40 years or older. This support consists mainly of seminars, information brochures, or the possibility of meeting with a financial planner.
- Employer support to plan for retirement is more common in Atlantic Canada (61%) than in British Columbia (20%).
Taylor Train is vice-president of marketing with Desjardins Financial Security. The company specializes in life and health insurance, including retirement savings products, and is the sixth largest life and health insurer in the market. He can be reached at ttrain@djfsc.com 
