By Gordon Pape, Editor and Publisher
Almost two-thirds of Canadians fear they will not have enough money to fund their retirement. But most of them aren’t doing anything much about it.
Those are two of the surprising facts to emerge from a new survey of over 1,500 people by Leger on behalf of Questrade Inc.
According to the findings, younger people (age 18-54) are the most concerned. But a high percentage of them are not planning to make any changes in the way they’re doing things.
Why? Because they’re content to follow the advice of their financial advisor (25 per cent), or they’re overwhelmed just thinking about it (23 per cent), or they’re not aware of other alternatives or don’t have time to research them (31 per cent).
Taken as a whole, the survey reveals that many Canadians suffer from an appalling lack of knowledge when it comes to retirement planning – this despite extensive media coverage, especially around this time of year, and many books on the subject, including some of my own.
So, let’s try to demystify the retirement planning issue to the extent possible. Start the process by asking yourself four questions.
Do I really need to worry?
If you’re a member of a defined benefit pension plan, especially one in the public sector, probably not. These plans guarantee income for life, usually at a level that will enable you to maintain your standard of living. Unfortunately, according to 2018 data from Statistics Canada, only about 25 per cent of the population belong to such plans. The rest of us should worry.
That includes those who belong to defined contribution pension plans, which are becoming more common. These plans provide retirement income, but it’s not guaranteed. The amount you receive will depend on how well your investments in the plan perform over the years. If you make bad decisions, it could cost you tens or even hundreds of thousands in retirement capital.
If you have no plan at all, then you need to be on the worry train. Your retirement income is entirely on your shoulders; there’s no one to help. If you don’t put any money aside, you’ll have to live off the Canadian Pension Plan, Old Age Security, and the Guaranteed Income Supplement. Together, they may provide a subsistence income, but not much more.
How much should I save?
If you’re in the “need to worry” group, the next step is deciding how much you need to save. The short answer is more than you might think. And the older you are when you start, the higher that number gets.
I can’t give you a precise target because it depends on several factors including your time horizon and your financial needs after retirement. But look at it this way. If you want income of $40,000 a year after retirement, you would have to accumulate a fund of $800,000 to withdraw that amount at a 5 per cent rate.
If you’re 35 now and plan to retire at 65, you have 30 years to build your fund. At a 6 per cent average annual compound rate of return, you would need to contribute about $10,000 a year to achieve that.
Where should I save?
A tax-sheltered plan, without question. We are fortunate to have two choices: RRSPs and TFSAs. The annual maximum for TFSAs is $6,000 so if you can contribute more the RRSP is the better choice. It’s also best for those in a high tax bracket, because you can deduct your contributions. TFSAs offer no tax advantage, other than tax-sheltering within the plan. They work best for lower income people.
Who should I ask for advice?
This is a delicate question. The financial industry is notorious for placing advisors in conflict of interest situations. You need to be sure the advice you’re getting is in your best interests and not based on the amount of commission your advisor is going to earn. That means asking up front how the advisor is paid and if there are lower cost alternatives to the securities being suggested.
For example, a lot of people rely on their local bank for guidance, and their advisors often push in-house mutual funds. There is no up-front commission, which leaves many people thinking they’re free. They’re not. A typical equity mutual fund will carry an annual cost of 2 per cent plus. An exchange traded fund (ETF) may be a fifth of that, or even less. Over 30 years, the savings could add 25-30 per cent to your retirement capital according to Questrade.
Based on my experience and correspondence with readers, I suggest the best course if you need advice is a fee-based broker. You pay a set percentage of your assets each year (usually 1-1.5 per cent) and that’s it. They don’t charge extra for stock trades and they’ll buy F-class mutual funds, the cheapest series available. If you want ETFs, no problem. Your annual fee covers everything so no conflict of interest there.
Of course, if you don’t need advice, use the cheapest discount broker you can find. But remember, you’re on your own. No one will help with your decisions. Make sure they’re good ones.
This article was originally published in The Toronto Star