Retirement Savings at Risk: Can Pensions Secure the Future?
Anthony and Deirdre, a couple in their 50s, are grappling with a fundamental question as they approach retirement: will their savings and investments be sufficient to maintain their desired lifestyle without the security provided by traditional, defined benefit employer pensions? Their concerns highlight a growing trend among Canadians as defined benefit plans diminish, and with it, the guaranteed income streams they once offered.
The couple’s worries are amplified by the imminent end of Anthony’s five-year contract position, which provides him with a defined benefit plan with a two per cent annual supplement. This contract earns him a tax-adjusted annual income of $125,000, alongside the pension, but it’s set to conclude within two years, leaving them without this steady income source. They have saved an impressive $840,000 in registered retirement savings plans (RRSPs), $380,000 in tax-free savings accounts (TFSAs), $810,000 in locked-in retirement accounts (LIRAs), and $400,000 in non-registered accounts. Their portfolio, primarily invested in stocks (80 per cent) with 20 per cent allocated to bonds, is set to provide a crucial source of income during their retirement years.
Their current financial situation is further complicated by their ownership of a home in Quebec, valued at $950,000, with a $450,000 mortgage at 2.19 per cent interest, effectively $2,000 per month. Despite their prudent saving habits, they are aiming to generate an income of approximately $135,000 per year to cover their aspirations, including travel and assistance with family and aging parents. They are currently contemplating the strategy of paying off their mortgage when it matures in September 2025, a decision driven by a desire to reduce their monthly expenses.
However, crucial to their planning are the government benefits they will potentially receive, specifically the Canada Pension Plan (QPP) and Old Age Security (OAS). The timing of these benefits, alongside their indexing, significantly impacts their overall retirement income projections. As of now, they may seek to receive benefits at approximately age 65, although further investigation into delaying benefits could optimize their income stream.
Speaking with retirement planner Eliott Einarson at Ottawa-based Exponent Investment Management reveals the broader context of Canadians’ retirement concerns. Einarson notes that a surprising number of individuals, regardless of their asset holdings, are questioning whether their savings will adequately meet their retirement needs. He emphasizes that the key metric isn’t simply the total amount of assets, but rather the generation of sustainable cash flow.
Einarson pointed out that the value of relying solely on fixed income streams can lead to overspending as confidence grows, rather than a disciplined approach. He advocates for a deeper understanding of one’s retirement income plan, including trade-offs between security and flexibility. Their portfolio, with its concentration on dividend-paying investments and a significant allocation to stocks, represents a solid foundation for generating income, and in fact, they are in a position to comfortably replace their income with all their registered accounts, Anthony’s modest pension, and future government benefits while simultaneously constructing a large tax-friendly estate asset through their TFSAs.
Einarson suggests that the couple should consider delaying the receipt of government benefits until age 65, and explore the option of purchasing an annuity to guarantee a stable income stream. Moreover, he advised that paying off their mortgage would reduce expenses and risk by 25 percent and make more room for travel and family responsibility. Despite their impressive savings, he stressed the importance of a comprehensive retirement income plan, visualizing their future income and understanding their potential trade-offs. Ultimately, confidence in their retirement plan hinges on thorough planning and a realistic assessment of their financial situation and long-term needs.
