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In our last blog, we talked about how increased life expectancy has created longevity risk, or the potential you will run out of money during your retirement years. It’s a real risk for the thousands of people who are members of capital accumulation plans (CAP) where the member takes on all of the risk of saving enough during their working years. Retirement planners call this period of our lives the accumulation phase of retirement planning.
There is a general principle that you will need to have 60% to 70% of your income immediately preceding your retirement from work in order to maintain your standard of living during retirement. Part of the rationale behind this target is that you are no longer devoting part of your disposable income to the accumulation of savings, nor are you incurring work-related expenses. You might also be eligible for OAS and CPP depending on your age at retirement.
However, these are just general guidelines. Many of us have no idea what our lifestyle costs today or what it might cost in the future, but we do know it will cost more. Even with nominal inflation, you would need roughly $100,000 in 20 years to buy the same goods and services that cost $50,000 today. That’s called inflation risk and we need to pay attention to it when setting your personal retirement goals for a retirement that could last 20 or 30 years.
Want more evidence? According to the Canadian Institute of Actuaries, a male aged 65 years today has a life expectancy of 19 years which means he is expected to live to age 84. Females still have better life expectancy – a female aged 65 today is expected to live to about 87. But here’s the planning risk for all us – the male has a 30% probability of seeing his 90th birthday while the female has a 41% probability of living to the age of 90.
So what will the government do for you? Well, depending on your retirement goal it could be a lot or not very much. Canada Pension (CPP) and Old Age Security (OAS) were designed to replace just 25% of the average industrial wage which is currently $52,000. The maximum payable from CPP today is $1,012.50 per month.
OAS is an income tested program which provides a maximum of $549.89 per month but you will see your benefit clawed back if your net income is more than $70,954 (including your OAS pension) in 2013. It is completely paid back at a net income of $114,640. By the way, if you will be 65 in April 2023, you’ll have to wait until you are 67 before you can claim the OAS benefit because they are extending the age of eligibility gradually for people born after March 1958.
Assuming you qualify for the maximum OAS and CPP benefits (most of us retiring today don’t), that means you can expect $18,748.68 per year if you retired today. Knowing this, you can now decide if some additional saving and planning is necessary as you approach your own retirement.
In Part III, of Re-thinking Retirement, we’ll have a look at a relatively new cohort: the Zoomer, and how they are changing the face of retirement. Are you a Zoomer?
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