This article was originally published in Maclean's Magazine on February 13, 2006
Few Canadians Follow Rules of Retirement Planning
Loretta Caponigro started putting MONEY into RRSPs when she was in her early 30s. Her investments were in small amounts and scattered among a variety of banks and mutual-fund companies. "I didn't know the difference between a GIC and ABC," she admits. "I was really ignorant." A human-resources specialist, she was also a spendthrift, regularly blowing almost her entire paycheque on designer purses and clothes. After about 10 years of freestyle investing - and spending - Caponigro consulted a financial planner. She told him she wanted to retire at 55. "He said I'd need a million dollars," she recalls. "He tried to be professional, but we both laughed out loud."
Caponigro isn't alone. Few Canadians of her generation have been following the time-honoured rules of retirement planning; fewer still are looking at Freedom 55. It's not as if people don't know what to do. The classic pearls of wisdom are trotted out every year in this post-Christmas, pre-RRSP-deadline season for anyone who'll listen. And if you tune into the experts, you'd swear the route to retirement riches is simple. Despite all the talk of pension funds in trouble and the bursting of the tech bubble and wavering confidence in the stock market, the basics of retirement planning don't appear to have changed. Caponigro - along with most other Canadians - should easily be wealthy by the time she reaches 55. Easily, that is, if only she'd follow the basic rules of thumb. Which, like most of us, she didn't, at least not until her retirement years were coming into sight.
With his much-celebrated guidebook, The Wealthy Barber, published initially in 1989 and reprinted every year since, David Chilton was among the first to promote a common- sense approach to retirement planning. The one-time stockbroker, now a consultant and educator, champions low-tech, practical planning. "Most Canadians are financial illiterates," he wrote in his book's first edition. Despite his heroic efforts, there's been little change since then, and the line remains in this year's updated version. Chilton is understanding, but he's not forgiving. "There's no excuse for our possessing as little financial knowledge as we do," he says.
Why is it so dreadfully difficult for most of us to plan our financial futures? Is it our collective overheated need to buy and consume more and more stuff? Are we just not earning enough? Just what is wrong with us?
First the facts. Here are the basic rules of thumb of retirement planning - and a reality check on what Canadians are actually doing.
MAKE A FINANCIAL PLAN AND STICK TO IT. At first blush, it seems Canadians get this: in one survey, 60 per cent of respondents aged 40 and older said they have a plan. But only half actually follow it. "Most people would rather spend more time perusing tourist brochures and following through with travel arrangements than reading about financial topics and staying on top of their financial plan," Desjardins Financial reported. "It's comparable," says the company's senior vice-president, Monique Tremblay, "to doing all the planning for your holiday and then intentionally missing the boat." In another survey, this one for Mackenzie Investments, the same age group admitted they haven't planned adequately. Two-thirds of Canadians in their 40s and 50s rate their ability to choose the right investment as fair or poor, and more than half of them (56 per cent) say they aren't saving enough for retirement. Yet personal finances are not a priority. When they were asked how they'd spend an extra five hours a week, time with family and leisure time, not surprisingly, topped the list. Spending time on personal finance ranked dead last, after sleeping and even working. And if American data has any relevance in Canada, this is frightening: about one in five Americans say the best way to accumulate wealth isn't to save, but to win the lottery.
PAY OFF YOUR DEBT, especially so-called bad debt, like the balance on your credit card. This is another pointer that Canadians, likely to a card-holding person, understand. Their No. 1 financial priority, Canadians told Manulife Financial pollsters, is to pay down consumer debt. Next is tackling the mortgage. Aware, clearly, of all the money they owe - and likely suffering sleepless nights over it - Canadians want to pay it off. Yet, in another survey, this one for Mackenzie, close to half of the 80 per cent of respondents who own a credit card carry a balance, with an average of $1,710.80. Collectively, the numbers are staggering. Earl Bederman runs a boutique research firm, called Investors Economics, that collects data from Canada's banks and other financial institutions and puts together a fascinating portrait of Canadian financial life. Its results include an aggregate household balance sheet. Bederman found that, on credit cards, lines of credit and other personal loans for 2004, Canadians owed a supersized $229 billion, or just slightly less than half the federal government debt of $500 billion.
PAY YOURSELF FIRST. Siphon 10 per cent off your paycheque and sock it into a separate account - you won't even notice, Chilton promises. Yet the savings rate in Canada since 1982 looks like the scary slide in a neighbourhood playground - steep and leading straight down to a well-worn dent in the sand. In 1982, our personal savings rate, the portion of after-tax income put into savings, was at a peak of 20.2 per cent. In 2004, it was a measly 1.4 per cent. Last year, from January to September (the final quarter isn't yet available), the rate entered negative territory, and we became a nation of what's called "dissavers," which means Canadians spent more than they actually had. At -0.5, -0.6 and -0.2 per cent, respectively per quarter, savings were at their lowest levels since the Depression.
MAX YOUR RRSP. Only a small number of Canadians will come close to the limit on RRSP contributions for 2005 of $16,500, or 18 per cent of earned income. In 2004, we collectively invested $29 billion in RRSPs, a fair chunk of change, but taking up only eight per cent of available room. There's another $342 billion that could have been used, but wasn't. Half of the Canadian taxpaying public uses less than half of its available contribution space, according to Analytica Management Consultants Ltd. Many are low-income earners who just don't have much money left over after living expenses. Wealthier Canadians do better. Almost four out of 10 who earn more than $80,000 a year use 95 per cent of their contribution space.
DIVERSIFY YOUR HOLDINGS. Or, don't put all your eggs in one basket. The fear is that one basket, whether it be the real estate market or equities, might collapse, leaving you with nothing. Partly due to a haphazard approach to investing, à la Caponigro, this is one recommendation that Canadians follow reasonably well. Rising real estate values have helped, too. According to Bederman, the house occupies about 25 per cent of the average household balance sheet; equities account for 33 per cent; fixed income represents 22 per cent; and cash and cash equivalents make up the remaining 20 per cent. This represents a major change; Canadians used to place their money mainly in very safe investments. But the boomers have invested more than previous generations in the stock market, and the percentage of assets in equities has almost doubled. "In the last decade, there's been a major transformation," Bederman says.
Traditionally people approaching retirement switch their portfolios into non-risky investments, such as money markets, to protect what they've got. But Bederman expects the boomers will behave differently, as they have in so many aspects of their lives. As the oldest boomers enter retirement age, the generation as a whole has begun to fret over its lackadaisical investing approach. Over half (56 per cent) told mutual fund company Mackenzie Investments they have not saved enough for retirement. Bederman forecasts that boomers will continue to hold risky investments - i.e. equities, as opposed to super-safe GICs - largely because they will be forced to seek the higher returns of riskier vehicles.
"Households make rational decisions," Bederman points out, explaining that what appears to be poor planning may well be a logical response to changing economic conditions. The free fall in savings has occurred over the same time that interest rates have tumbled. Meanwhile, house prices have risen. More money has shifted from savings to real estate, Bederman says. The lack of savings could in part reflect a rational shift in investments from interest-bearing funds, at low rates, to a booming real estate market.
Dilip Soman, a professor of marketing at the University of Toronto's Rotman School, sees another reason for poor retirement planning: myopia. "The realities of what might happen if you haven't saved enough are not very salient," he says, pointing to the power of consumer merchandizing and marketing. "Consumerism is booming. People's success seems to be judged by how many material possessions they have." Financial institutions could do a better job of promoting saving over spending. "The marketing of savings products has been nowhere near as creative and innovative as the marketing of lifestyle and luxury and entertainment products," Soman says. "Unless we give consumers a good reason to save, the myopia tendency will always stay and strengthen."
As boomers age, and their attention shifts to saving for their own retirement, they may inadvertently help younger people do the same thing. Bederman expects banks and other financial institutions to come up with new financial tools that help people save money, at the moment that the largest demographic group needs them most - just as over the past 20 years, when boomers were in heavy spending mode, the banks came up with specialty loan products like point-accumulating credit cards and the homeowner's line of credit. Caponigro, for one, doesn't think she'll be able to retire at 55, but the 46-year-old has changed her ways. "I'm now pretty frugal, actually," she says. "I'm not finding it difficult to put the money away. I have done a 360 in terms of spending. It's not so important now to have things." Roughly 10 per cent of her salary goes into a savings account, and most of that is eventually deposited into her RRSP. Another 10 per cent is directly deposited into a separate group RRSP offered through her workplace. Still, retirement, she admits, is a way off, as it is for many people her age. "If you look at what I have to date," she says with a laugh and a sigh, "I'll have to work for a long time."
Jennifer Godwin, 23, law student
"At the end of this year, I'll be $10,000 in debt. I've been debt-free until now, but I just can't do it anymore. I've got government loans and a line of credit. I feel that the career I'm choosing will help me figure out my retirement later. I'm not really too worried."
Mihai Musceleanu, 39, superintendent
"My wife and I emigrated three years ago from Romania. We came with a lot of money, but we've spent everything. We have some debts. I didn't know exactly what was an RRSP, so in the next months we will find a financial adviser to figure out how to save for later."
Wendy Cain, 55, artist
"I don't plan very well. I feel desperately sorry that I didn't listen to my frugal mother who went through the Depression and told me to be smart and pay attention. But I was a child of the Sixties who thought the safety net would be there. So now I'm really sorry."
Sukhy Jawanda, 36, counsellor
"I invest in RRSPs through my paycheque every two weeks. My other focus is on real estate, the home that we're currently living in. When we retire, maybe we'll downsize to a smaller place. My concern is, because we'll be living longer, whether it will be enough."
Humberta Araujo, 44, journalist
"I have done a little planning, but not much. As a single mother, I don't have much money. Everything is spent on the things I need each day. I am waiting for things to get better. I know it's very important to have a plan, but you really have to have the means to do it."
Steven Masson, 22, university student
"I started an RRSP, with money in government bonds, but I haven't sat down with anyone at the bank to work out a financial plan. I have a credit card but I don't use it very often. I'm pretty careful in how I spend my money. I'm trying to build up my credit rating."
Shervington Kerr, 45, consultant
"I got into debt - in the tens of thousands - with some artistic projects. I'm trying to clear that up. I was just thinking, if I cut down the amount of Starbucks coffee, change my cellphone plan, and some other small things. ... After that, the next move is a house."
Asad Fatmi, 32, mortgage specialist
"I'm a new dad, and just opened an RESP account for my son. My mortgage is on an express payment plan. I move 15 per cent from my paycheque to a regular savings account. And 10 per cent goes to an RRSP automatically. Ideally, I'd like to retire today."
Dionne Miller Shaw, 33, unemployed
"I have used up my savings, and am about $10,000 in debt. I know the importance of saving for retirement. But that's a bit delayed. I want to retire in my 50s, because I don't want to work, work, work until the very last day. I want to enjoy some of it."
Maclean's February 13, 2006