With an increasing cost of living, senior citizens these days are retiring later in order to improve their standard of living during their retirement years. They are also living longer due to medical advances and therefore retirement is costing more. According to a recent article by the Washington Post “a record number of Americans over 65 are working — now nearly 1 in 5. That proportion has risen steadily over the past decade... Today, 9 million senior citizens in the United States work, compared with 4 million in 2000.”*
Retiring “well” it seems is increasingly harder to achieve.
We at Open Access believe that “All Canadians Deserve to Retire Well”. By “Well” we mean to have sufficient financial resources at retirement to maintain the standard of living a person achieved during their working career. To have a shot at achieving this goal a plan member needs to:
By “manage that capital productively” we mean:
Earning an above median investment return.
Assuming the appropriate level of investment risk, and
Controlling investment costs.
Not an easy task for someone new to the challenges of investing. That’s why we do it all for them!
The shift from defined benefit to defined contribution pension plans
The closure of Sears Canada is the most recent example of the risk of depending too much on a defined benefit pension plan to provide income in retirement. Sears has been paying $3.7 million a month to top up its underfunded defined benefit plan, as required by Ontario provincial law, but has asked the court to allow it to suspend those payments while it restructures. Unfortunately, as in the case of Sears it’s the employees that suffer the consequences if the plan isn’t fully funded and a sponsor is unable to make payments. **
Over the past 20 years many employers began moving away from defined benefit to defined contribution pension plans, but this trend also had consequences for the average employee as under a defined contribution arrangement the onus was on them to ensure they were saving enough for retirement.
Open Access was originally conceived back in the 1990s when the trend from defined benefit to defined contribution pension arrangements first gathered momentum. At that time it became evident that ordinary Canadians needed help managing defined contribution retirement plans because of a number of pressing questions, such as:
How does a plan member assume the responsibility for the investment management of their retirement savings when they know little or nothing about investing?
How does a member determine how much investment risk is appropriate for them to assume?
How does a member keep investment management costs under control?
And most important of all, how does a plan member determine how much they must save each year to produce a sufficient pension for their retirement?
There are also questions that need to be addressed, such as; ‘what is the longevity risk?’ and ‘what are the chances that a member will outlive their pension resources now that medical advances are enabling Canadians to live longer?’
Retiring “well”, once assured under a defined benefit pension plan, has now become increasingly elusive for the average worker. According to the Federal Reserve “among people between 55 and 64 who have retirement accounts, the median value of those accounts is just over $120,000.” Hardly enough to retire “well”.
The importance of fees
As mentioned above, controlling investment costs is important. Charts such as the following one show how important fees are in amassing sufficient assets to finance one’s retirement years.
This chart demonstrates the cumulative impact of even a small difference in fees on a portfolio. The lines shown represent the asset value of two funds, one with total annual fees of 1.00% and the other 1.25%. Both funds are assumed to be earning a 6% gross annual investment return. Each fund begins with a balance of $25,000 and includes annual contributions of $3,000 for 40 years (age 25 to 65); thereafter, contributions cease, and a retirement income is withdrawn from each fund at a monthly level that exhausts the balance over the next 30 years (age 65 to 95). A 0.25% difference in fees produces a difference of $280 in retirement income each month, or a total of $100,822.
This is meaningful.
Future blogs will explore these issues in our continual search to increase the probability that individual plan members can truly retire “well”. We certainly do not have all the answers, and therefore look forward to new ideas and thoughtful comments from our readers. Please comment below if you have any subjects you would like to see us write about or commentary about the future of retiring “well”.
** source: https://www.thestar.com/business/personal_finance/2017/09/18/sears-pension-slap-shows-need-to-diversify-savings.html
Warren is the founder of Open Access, a company whose prime objective is to ensure plan members not only retire, but retire “well”.