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THE BOTTOM LINE

CANADIANS MUST TAKE MORE RESPONSIBILITY FOR A FINANCIALLY SECURE RETIREMENT

CANADIANS ARE ILL PREPARED TO FUND THEIR INCOME REQUIREMENTS

DURING THEIR  2ND  30 – 40 YEARS I.E. FROM AGE 55 OR AGE 65 TO AGE 95

 

 

As Canadians live longer, they will need to be savvy about their finances to enjoy security in their golden years, a recent Fidelity Investments retirement survey suggests.

Noting that at the start of 2015 we are now half-way to the start of a new decade, Fidelity Investments has shared some trends gleaned from a survey of 1,380 Canadians age 45 and older, which it main­tains will shape the remainder of this decade.

Peter Drake, Fidelity’s Toronto­ based vice-president , retirement and economic research, cited a number of risks to a financially se­cure retirement , with longevity at the top of the list. “With an       aver­age retirement age  of  62  today,” he said, “many Canadian face re­tirements as long as their working lives.”

The effects of inflation was  found to be a major concern among those surveyed . “Inflation is a huge problem for people in retirement ,” Drake  said.  “Even  a  relatively low inflation rate of 2 % each year would wipe out 40% of a retiree ‘s purchasing power  over 25 years.”

And he noted  that  the  cost of health care, especially in the final years, could also severely under­mine  retirement  savings.

The bottom line is that Canadians must now take greater responsibil­ity for their retirement.  The  sur­vey found that 47 % of those who haven’t yet retired plan to work in their “retirement ” years. But plan­ning to work in retirement , Drake said, is not a valid retirement plan. The survey found  that although one in five retirees said they would like to work if they could, 38% cited health problems that pre­vented  them  from  working;  23% said  employers  are  not  interested  In employing retirees; 15% said they couldn’t find jobs; and 12% said caring for a family member prevented them from working.

Tax management

Tax management is critically important for Canadians who are entering retirement , noted Peter Bowen, Fidelity’s vice-president, tax research and solutions. “The key is maximizing after-tax cash flow,” he said. “Tax-bracket  management can minimize taxes over the retirement timeframe.  Any income above the Old Age Security claw back is subject to a very high tax rate.”

And it is crucial that investment portfolios have the right asset al­location for the retiree’s risk toler­ance,  and  the  appropriate  rate of withdrawal.

The  survey  showed  that  only 10% of retirees have a written plan to transfer wealth to another gen­eration   in  a  tax-efficient way.   Not everyone has a will, but those who do may not be transferring their assets in a tax-efficient way, said Jason Stahl, Fidelity’s market research manager.

Drake  noted  that  succession planning must also take surviving spouses into account. “Generally speaking, two spouses will not die at the same time,” he said.  The second spouse could live decades longer and may require costly care.

Many baby boomers who are entering retirement are still fund­ing their children’s education.  “And the financial pressure doesn’t stop when the children graduate,” Drake said. “Starting salaries are low and adult children may require housing.”  And 29% of the retirees surveyed and 62% of the non-retir­ees said they were providing some assistance to elderly parents.

ROSEMARY MCCRACKEN

The Insurance & Investment Journal

January 2015

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