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Will Canadians Live To Regret Their Lack Of Financial Planning?

By: Annick Douville

To better cope with the issues that arise from employee empowerment over their pension plans, insurers and retirement services providers have taken helping employers fulfill their fiduciary responsibility to a new level in recent years. Yet, Annick Douville, of Desjardins Financial Security, says a recent survey shows many Canadians have failed to realize the importance of making enlightened retirement planning decisions.

Although employees look forward to a golden retirement, few of them understand how important it is to plan for this stage of life. This lack of planning is potentially disastrous for those who enter retirement with, among other things, dismally low savings levels and crippling personal debt.

In January 2003, Desjardins Financial Security retained SOM Surveys, Opinions and Marketing to interview 1,000 Canadian adults on a wide range of retirement issues. Several interesting socio-demographic and financial planning trends were identified. These trends – the bear market, the impending labour shortage, and lack of financial planning – may negatively affect graying employees as well as the companies they work for.

Financial Realities & The Pension Fund Disconnect

In his book 2015: After the Boom – How to Prosper Through the Coming Retirement Crisis, Garth Turner suggested that the Canada Pension Plan will be bankrupt by 2015 as nine million Canadians retire at the same time. Facing surging program costs and a dwindling tax base, Turner believed it would be impossible to maintain Canada’s existing social safety net.

A staggering 76 per cent of those surveyed, who have not fully retired and are under the age of 65, agree. They believe the federal government is unlikely to meet its obligations in the future. The survey also notes that while close to half of employed Canadians contribute to some form of employer pension plan, less than half of them have faith in their employer’s ability to pay benefits.

Their apprehension may be justified. The bear market took a big bite out of many pension plan portfolios. In fact, pension consultants Watson Wyatt reported earlier this year that pension funds worldwide had lost US$2.8 trillion – 21 per cent of their value – since 1999. And Jonathan Chevreau wrote in his January 21, 2003, National Post article Seven of 10 resigned to working in retirement, this prompted the normally cautious Economist magazine to declare the bear has left “many companies with big pension shortfalls, which may weigh heavily on share prices for years to come.”

Also, when employers moved to Defined Contribution plans and group RRSP programs, employees became responsible for making some tough decisions on how to invest their retirement funds. Unfortunately, few of them have the financial planning skills to do so.

Many employers acknowledge that they have a role in helping employees plan for retirement. The survey found that support from the employer to help people plan their retirement is a possibility for more than 40 per cent of workers who are 40 and older. Interestingly, this changed depending on the region where they live. For example, employer retirement planning is more common in Atlantic Canada (61 per cent) than in British Columbia (20 per cent).

In order to better cope with the issues that arose from this employee empowerment, insurers and retirement services providers have taken helping employers fulfill their fiduciary responsibility to a new level over the past few years. For example, comprehensive education programs and varied and valid information have been provided to employers and plan members to enable them to make enlightened retirement planning decisions. When combined with the vast array of individual services available from professional financial representatives, this information should ensure that almost every worker has at least a somewhat structured savings strategy in place. However, even when the different available tools are efficient, it doesn’t change the fact that most people who are not close to retirement generally feel they have very little money to put aside for their golden years and do not wish to be reminded of the fact they are not saving enough for the future.

2015: Where Have All the Workers Gone?

Baby Boomers (aged 37 to 56 in 2001) currently make up close to half of Canada’s work force. Some economists believe that when the Boomers retire, there will be 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 Canada’s existing social safety net with a reduced tax base, it will be challenging to find experienced staff to fill positions vacated by the retirees. This may be one of the reasons the Ontario government recently promised to modify the existing rule on retirement dates.

The Ottawa Citizen reported, in the February 14, 2003, article Rethink Retirement: Labour shortages loom due to flawed pension policies, it may be worthwhile for employers to engage in workplace policies that encourage aging employees to continue working by, for example, allowing them to retain at least some pension benefits.

Another idea gaining popularity is to encourage employees to gradually reduce the amount of time they work as they age (phased retirement). The Citizen article suggested this has merit because it helps maintain tax revenues that are needed to fund Canada’s pension and social security systems. It also creates jobs for younger workers which allows companies to renew themselves while retaining access to the invested gray matter of its veterans.

If companies want older workers to delay their retirement, timing is critical. The survey finds that only 21 per cent of gainfully employed Canadians aged 40 and older are willing to consider postponing their retirement.

At any rate, even with the incentive of increased salaries and enhanced benefits, it may be harder for employers to retain older employees than they first thought. Even with incentives, close to half of the people surveyed still planned to retire as soon as they were eligible to do so. Moreover, 16 per cent of people surveyed said even if they received an ideal offer to work fulltime in their dream job, they would not postpone their retirement. Only four per cent of the full-time retirees are definitely considering getting back to work, many as independent contractors –the New Entrepreneurs – and not as employees.

Financial Planning is a Process, Not a One-Time Event

Although most people will lose as much as a quarter of their personal income when they retire, only a few report adjusting their retirement plans to address the shortfall. It’s almost as if people say to themselves, “That’s it, I’m retired, I don’t have to deal with this anymore.” Yet, when we think of financial planning in the same way we think about education – as a life-long process rather than a one-time event – failing to plan after retirement is not only ludicrous, it’s dangerous.

Still, it may be virtually impossible for many. Most younger, employed Canadians have a mortgage, kids, and car payments. Even with a salary of $55,000 to $60,000, they struggle to make ends meet. Although people should, in principle, be debt-free when they enter retirement, many are not.

No wonder the survey found that only 16 per cent of Canadians under 65 who have not fully retired believe they can set aside enough money for this phase of life. More than half have less than $25,000 in savings. And 69 per cent of Canadians with individual RRSPs have less than $50,000 in their retirement accounts.

This has helped create a new generation of workers – the New Entrepreneurs, those full-time retirees considering getting back to work.

Whether they have been outsized, downsized, or resized, the New Entrepreneurs have chosen to augment their retirement income by working. But, they are not interested in functioning in a traditional role or in having a traditional employment arrangement. Although this shift has given them an incredible amount of freedom, many of these New Entrepreneurs may still find themselves in the ranks of the benefitpoor retirees.

For others, both Boomers and New Entrepreneurs, increased life expectancies will likely mean they face significant long-term healthcare bills – first for their parents, and ultimately, for themselves and their partners. This means that they need to plan for critical recovery, dental care, escalating drug costs, hospitalization, and the life qualities they want to have if they, or their loved ones, become ill or disabled.

The survey confirmed, for example, that although 52 per cent of retirees have life insurance, only half of the respondents and a quarter of retirees have disability insurance. This will become even more of an issue as the government modifies Canada’s healthcare system.

Individual Canadians must, therefore, develop a healthcare 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.

Although many people plan to retire, few have a plan outlining how they will manage their financial well-being, their health well-being, and their life wellbeing. Amere handful of those surveyed understood, for example, that without addressing estate, insurance, and healthcare considerations, a stock or mutual fund purchase program is NOT a complete financial plan.

Too many retirees run the risk of losing everything because they don’t understand the consequences of their financial decisions.

Significant increases in out-of-pocket healthcare costs, combined with drastic reductions in health benefits, along with concerns as to whether the CPP, QPP, and even employer pension plans will be there when they are needed, create the spectre of a scenario where retirement poverty could supplant child poverty as the number one issue in the future.

All levels of society – from the financial services industry and government authorities responsible for pension benefit legislation to public and private employers – have a crucial role to play in making sure Canadians fully realize the importance of saving for retirement. The good news is that as the bulk of the Baby Boomers gradually get closer to retirement age, the challenges of responsible pension fund management, labour shortages, and proper financial planning may finally generate the sense of urgency they require.

Annick Douville is vice-president of group retirement services, group network, at Desjardins Financial Security.

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