Retirement ? No way ! At 81, US President Joe Biden is fighting to retain the most demanding job on the planet. At 89, Italian designer Giorgio Armani has no intention of handing over the reins of his fashion empire. And at 93, legendary investor Warren Buffett still brilliantly manages his US$870 billion business.
And you ? We bet that you don’t want to work until your last breath, which is quite legitimate. But retirement planning remains a big challenge, much like climbing a mountain.
Throughout our career, we climb while amassing money in our backpack for retirement. Once at the top, we hope to have enough savings to go back down to the other side of the mountain.
Over the past fifteen years, governments have made a lot of effort to open the road to the top of this mountain, notably with the creation of the TFSA or improvements to the Quebec Pension Plan (QPP).
The problem is that once at the top of the mountain, many retirees are abandoned to their fate. No guide. No trail. It’s hard to know if their backpack is full enough or how long the descent will last.
It makes you dizzy.
The stakes are high. Within 20 years, the population aged 75 and over will more than double. And tomorrow’s seniors will not be entitled to a pension guaranteed by their employer until the end of their days. In the private sector, only 1 in 10 employees can still count on this type of “defined benefit” plan.1.
And the others ? Many do not participate in any retirement plan, according to Retraite Québec2. In fact, 41% of Quebecers who earn between $30,000 and $50,000 have not built up any retirement savings. And among those who save, some only make modest contributions. At this rate, they will have to significantly reduce their standard of living in retirement.
Even those who accumulate money in a “defined contribution” plan with their employer or in an RRSP are not out of the woods. Once retired, they must fend for themselves, with all the risks that entails.
Risks of management error or fraud, especially when cognitive abilities decrease. Risks of disbursing your savings too quickly by underestimating your life expectancy (did you know that a 60-year-old woman has a one in four chance of living to 96?). Or, conversely, the risks of depriving yourself of spending excessively, for fear of running out of money later.
This is not only a personal finance problem, it is also a public finance issue. We’re talking big money: Canadians have accumulated $1.5 trillion in RRSPs and other accumulation plans3.
It is time for governments to further define the crucial stage of disbursement of these retirement assets. As a society, we have a duty to find solutions now, so as not to let future retirees live in financial stress.
No need to reinvent the wheel. A model has already been proven at the University of British Columbia. For more than 50 years, the retirement plan has made it possible to purchase a variable payment life annuity (RVPV)4also known by the less daunting term “dynamic annuity”.
Upon retirement, the employee can use the money he has accumulated in his plan to purchase a pension that will be paid to him for life. The amount is not set in stone: the payment fluctuates depending on the life expectancy of the group and the returns obtained. But thanks to this pooling, management fees are very low, which maximizes the money that ends up in the pockets of retirees.
More flexible than a conventional annuity. Less volatile than self-managed investments. The dynamic annuity is a happy compromise which deserves to be extended to the whole country to help retirees disburse their pension plan and even their RRSP, like Australia which has just adopted a similar principle on a large scale.
In Quebec, regulatory changes are underway. We hope that the fruit will be ripe in 2024. But if we do not want the product to remain on the shelves, we will have to make sure to make it well known. This is the biggest challenge.
Same thing for the deferral of government pensions, a tool that already exists, but remains underused. The longer you wait, the more it pays off. For example, by applying for pensions at age 70, instead of the normal age of 65, we obtain 42% more from the QPP and 36% more from Old Age Security (PSV).
It is essential to better inform retirees about the advantages of deferring their pension, even if it means using their personal savings to live on during the first years of their retirement, in order to provide peace of mind for their old age. An enhanced pension. 100% state guarantee. Fully indexed. It’s worth gold, right?
Retraite Québec’s efforts in this direction already seem to be bearing fruit, since Quebecers applied for their pension at age 62.7 in 2023, almost a year later than in 2020 (61.9 years).
For those who hesitate, we could even offer to cut the pear in half. Take half of the QPP sooner and the other half later. A gradual approach might be less heartbreaking than a binary choice.
Another idea to explore to help retirees come back down the mountain. Without dizziness or slipping.
1. Read “Running out of time: an urgent call to fortify Canada’s private retirement pillars”
2. Read the public consultation on the Quebec Pension Plan
3. Read “Affordable Lifetime Pension Income for a Better Tomorrow”
4. Visit the University of British Columbia website (in English)