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PETER DOLEZAL: Retirement income needs revisited
An oft-cited mantra of many financial planners is that to be comfortable in retirement, we need to target 70 per cent of our pre-retirement income. This is such a broad and often misleading generalization that it merits comment.
How can there be one-size-fits-all retirement income? Clearly the same retirement target cannot be applied to both the $150,000 and the $20,000 earner. Despite the inherent flaw in reporting “averages,” the typical Canadian retiree actually manages quite well on about 55 per cent of pre-retirement income. About half that income comes from CPP, OAS and, for the truly needy, the Guaranteed Income Supplement. Regardless of how we each define it, to be “financially comfortable” in retirement, we need the necessary funds to come from work-place pensions or from investments.
Of the approximately 15 million employees in Canada, about 40 per cent belong to some form of employer-sponsored pension plan. Unfortunately, this leaves the other 60 per cent with no employer-pension plans. It is these future retirees who must scrimp, save and invest enough during their working years to not only supplement their government entitlements, but also ensure these investments are sufficient to minimize the risk of depletion during an increasingly lengthy retirement.
Equally important, possibly even more so, is the need to enter retirement with minimal and preferably zero debt. Although we know we should shun debt at any age, realistically most of us cannot avoid debt when we are young and even middle-aged. Many of us need student loans to pursue post-secondary education and few of us can buy a home without a mortgage. However, once carried into retirement, debts can become insidious.
A recent Bank of Montreal study found that 51 per cent of Canadian homeowners plan to carry at least some mortgage debt into retirement. In the high-flying B.C. real estate market, that number is projected to exceed 60 per cent. Although planned, this increasing debt burden of our future retirees threatens our current status as the country with the lowest level of retiree poverty in the developed world.
Should a retiree be lucky enough to hit that mythical 70 per cent income objective, his ability to service and repay any form of debt will be greatly diminished once he retires.
Is there a solution to this emerging trend? While still employed, make the paying down of debt the No. 1 priority – even more critical than saving and investing. Debt should be viewed as the No. 1 enemy by everyone approaching the end of a working career. For those already retired and still in debt, it isn’t too late. Homeowners can consider downsizing and with debts paid off, discretionary income will immediately increase and financial stress will decrease.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.