Retiring on the instalment plan

CAs positioned to help clients manage today's phased retirement reality

By André Langlois

Until recently, many older workers thought of retirement as a single event that happened at some predetermined point in their lives. Today, few Canadians can afford to retire with an abrupt stop. Whether they need to earn additional income to top up their savings or pension or to pay for mushrooming old-age home and health-care costs, many must continue working beyond the normal retirement age, at least part time.

These new realities come through very clearly in the latest annual Desjardins Financial Security survey on retirement. As the survey confirms, retirement has become a process, complete with various stages, rather than a one-time event. This change can be quite empowering because it gives older workers the ability to decide when and where to work, for how long and on what projects, as well as at what age to retire.

Human Resources Development Canada broadly defines phased retirement as any program that allows for gradual decreases in working time and workload instead of an abrupt move from full-time employment to retirement (http://labour.hrdc-drhc.gc.ca/worklife). Currently, there are two forms of phased retirement: a gradual reduction in preretirement hours (or days) of work or part-time work after retirement for pensioners who wish to remain employed. In fact, many of Canada's current collective agreements include phased retirement as a strategy to retain older workers and to facilitate their transition into retirement.

However, by resolving one issue – the need for extra cash – progressive or phased-in retirement strategies create other problems for Canada's retirees. For example, HRDC cautions older workers who opt to work beyond the normal retirement age to carefully consider the impact of such decisions on, among other things, their benefits coverage. A new generation of progressive retirees needs a CA's advice to understand the true impact of all of these pre- and postretirement decisions.

Progressive retirement is the new reality
The latest Desjardins survey indicates that boomers (workers 40 to 54 years of age) think it is almost impossible to save the cash they need to retire at 58 years of age. However, the majority of respondents (92%) believe retirement at the traditional age of 65 is still a realistic possibility.

A majority of European Union countries (and Norway) consider progressive retirement a worthwhile retirement strategy. For example, European Union Employment Guidelines call on member states to "develop policies for active ageing with the aim of enhancing the capacity of and incentives for older workers to remain in the labour force as long as possible, by adopting positive measures to maintain working capacity and skills of older workers, to introduce flexible working arrangements and to raise employers' awareness of the potential of older workers." (http://www.eiro.eurofound.eu.int).

In Canada, a number of universities as well as Air Canada and the National Automobile, Aerospace, Transportation and General Workers Union of Canada have already established programs to give their older workers the option of deferring retirement or continuing their employment on a part-time basis.

Desjardins' most recent survey shows that 61% of Canadian workers over 40 years of age plan to work 21 hours a week in the early years of what used to be a full retirement, often as independent contractors. Many of these "new entrepreneurs" do not have the necessary business and financial skills to run a successful enterprise and the ongoing input and guidance from their CA helps them address any gaps in their personal expertise.

The impending labour shortage
In an article on work-life balance in Canadian workplaces, HRDC indicates that the current employment landscape is characterized by both a shortage of skilled workers and a rapidly ageing workforce. 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, but it will be challenging to find experienced staff to fill the positions vacated by the retirees.

Canadians appear to be reasonably conscious of this development. As in 2003, half of those surveyed by Desjardins are aware that a labour shortage has been forecast within a few years. Of those, 71% support changes to existing legislation that would allow them to work beyond 65 years of age and to continue to receive their old-age pension without penalty.

Benefits of phased retirement
Phased retirement programs are beneficial for your clients who are employers because they ensure an intergenerational transfer of skills. By failing to plan for the transition of all levels of retiring staff members, these employers run the risk of seeing years of investment in brand, culture and training retire along with their older employees.

Our research shows that if client employers want their older employees to stay on, it is important to introduce this possibility as early as possible. According to the survey results, only 18% of gainfully employed Canadians aged 40 and up are willing to consider postponing their retirement. This is down from 21% in 2003.

The survey identified seven key reasons older workers welcomed phased retirement:

1. Not to be totally inactive: 83%
2. To maintain standard of living for a while: 82%
3. To do some worthwhile activities: 79%
4. To get some additional income: 78%
5. To have social benefits: 51%
6. To ensure continuity of the job: 43%
7. To have a job they wanted for a long time: 34%

While inactivity is the key motivator, having additional income and other safety nets such as insurance and social benefits is also very important to those entering their retirement years.

It is also worth mentioning that 7% of the new elders (55-64 years old) who currently consider themselves workers are actually former-retirees. Moreover, nearly one in every 10 people surveyed who consider themselves retired is in fact gainfully employed on either a full or a part-time basis. And we all know employment decisions have tax consequences!

Paul Theriault, president of the Direct Sellers Association of Canada, agrees that many new entrepreneurs choose a postretirement career in direct sales. "Our research indicates there are many older workers involved in direct selling on a full-time basis; 14% of the independent sales contractors are 65 years and older. Their involvement in direct sales is the first opportunity for many of these new entrepreneurs to own and manage their own businesses. Being new to the business world, they really appreciate that, for no- to low- capital outlay, the company they represent will often teach them the sales, marketing and advertising skills they need for direct sales success."

Yet a successful business is more than a good sales and marketing strategy. There is a whole generation of new entrepreneurs out there who need the services of a good CA.

Like retirement, financial planning is a process
Lack of awareness about viable retirement options and strategies remains a big challenge for many Canadians. For example, only a handful of retirees understand that without proper financial planning, they cannot protect their loved ones after they have passed on.

It may shock you to learn just how many of your clients fail to understand 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.

Post-bubble stock market declines, exacerbated by investor reaction to corporate financial scandals, have negatively impacted many pension nest eggs. Our most recent research shows that although stock markets improved in 2003, most retired people stayed with "safe" lower-return investment products – even when the rate of return was inadequate to meet their future retirement needs.

Moreover, since defined-contribution plans and group RRSP programs do not specify how much money will be paid to employees when they retire, employees must do some financial planning as well as make choices about how their money is invested. There is little if any employer assistance for them to do this.

This means far too many Canadians risk 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, CAs can help clients avoid costly mistakes.

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.

Overall, 52% of full- or part-time working Canadians are covered by a group insurance plan. Upon retirement most workers are automatically excluded from group insurance. What happens if retired workers have to deal with a debilitating illness after they are no longer employed? Without adequate insurance they run the risk of becoming wards of the state, which will provide only limited free long-term care – and only if they are impoverished.

Individual Canadians must therefore develop a health-care plan and begin saving, much as they do for retirement, so they can have their personal health looked after in an appropriate manner. CAs can help their clients plan for this essential component of their financial plan.

Financial planning as a process
Many Canadians will be required to support themselves for longer periods by making their pensions go farther, increasing their savings and/or extending their working lives. Although phased or progressive retirement is the new retirement reality for many, few retirees understand the tax, pension or health benefit consequences created by this phase of their working lives.

Only when Canadians begin to treat financial planning as a process rather than a preretirement event, can they begin to create the money practices that serve them well in all life stages, especially in the years leading up to and during retirement, when they don't have the time to recover from any costly mistakes.

By failing to plan for the new retirement realities, too many Canadians could outlive their means and/or need to liquidate assets to pay for their care. As arm's-length professionals, CAs have the skills and experience to help clients age well and move into the dark of night with dignity.

Related articles: "Financial planning on the rise," CAmagazine, March 2003

André Langlois is vice-president of product development and marketing, savings and segregated funds at Desjardins Financial Security.  He can be reached at andre.langlois@dfs.ca