RSPs Part 2: Three out four gen-Xers are unprepared for retirement: Study
By: Susan Lazaruk
Three out of every four generation Xers are unprepared for retirement, according to a TD Canada Trust study that surveyed those age 41 to 52.
“And two-thirds of those people say that keeps them up and thinking about that at night,” said financial planner Jillian Bryan at TD.
Baby boomers, those between 53 and 71, on the other hand, are likely better prepared to have financial certainty in their later years, she said.
“TD has done studies to find they’re better prepared than what they say they are in the surveys,” said Bryan. “They’ve had good (investment) markets for a number of years, rising house prices for a number of years and they keep and hold down good-paying jobs for a number of years.”
She and other experts note that the “gold standard” for pension plans — those called defined benefit plans, which are indexed to inflation and usually have companies matching an employee’s contributions — are now rare.
To show the importance of contributing early is the example where a 25-year-old who puts aside $3,000 a year in a tax-deferred retirement account for 10 years only (assuming a seven-per-cent annual return) will have more than $338,000 at age 65, according to experts.
Fears of financial insecurity in retirement can be laid to rest with a financial plan.
“Anyone older than 25 should have one,” Bryan said. “And revisit it every three years.”
Gen-Xers, those born between 1965 and 1976, should capitalize on the fact that they’re in prime earning years.
“Most people spend more time researching what kind of car they want to buy than working on their financial plan,” she said.
If they wait too long, she said, it will be too late to compound any interest.
Take full advantage of RSPs, which defer taxes to later when you’ll be in a lower tax bracket, and tax-free savings accounts, up to $52,000 this year, which allow you to grow your savings without paying tax on the savings or their interest growth.
Myriad online tools to track spending and to forecast savings can help you to see how a latte a working day adds up to more than $800 a year.
The Service Canada retirement calculator is provided by the federal government and is an excellent tool. It can show you what your income would be if you retire at a certain age by monthly increments.
“Look at the amount of time you have before the age at which you’d like to retire and what you can expect to earn each year before then,” said Bryan. “And set a savings goal based on that.”
It can help you see when it might be advantageous to start collecting your Canada Pension Plan payments. The earlier you start after age 60 (even if you continue working), the lower the payments but the longer you collect.
The working landscape is changing because people are living longer and better. The TD survey of baby boomers found it was a myth that people are retiring at the traditional age of 65, with 38 per cent in 2009 working into their 60s and 70s, up from 25 per cent in 2000.
“We have the ability to work remotely and for a lot of people, they quite enjoy their jobs, so why not keep working? It keeps you fulfilled,” said Bryan.
And she said those who are comfortable financially are returning to secondary education and doing freelance work in a particular area of expertise.
“They’re doing it out of whatever love they have for their occupations,” said Bryan.
And a debt consultant, Brian Pybus, who runs debtfreefiftyfiveplus.ca, said it’s never too early to start spending less and living more modestly in preparation for retirement when most people will see their earnings decrease.
“People think they can spend after retirement the same as they are during their working years and they can carry debt into retirement and service it, but most can’t,” he said.
While boomers are generally prepared for retirement, particularly in Metro Vancouver where they live in their biggest nest egg, their appreciating homes, Bryan said a sensitive issue she usually has to broach with them is “parents who are helping adult children perhaps to the detriment of their retirement plan.”
“You need to to sit down with your children and talk about what your financial plan allows you to help them with for tuition and so forth,” she said.
But children and other family can be used to spread earnings around, said Chris Catliff, CEO and president of Blue Shore Financial in North Vancouver.
“If somebody has an extra $100,000 to invest and is a boomer and is looking to retire … you want to maximize all tax-advantageous structures out there and some of those may be investing with a family member in a lower tax bracket” to income split, so you’re not being taxed at the highest income-tax rate.