Young Adults Worried About Retirement: Don't Get Mad, Get Saving

When William Lem, 24, thinks about the recent bump up in Old Age Security age eligibility, he feels angry, frustrated and discouraged.

“With this cutback, I know I will need to put away that much more – and I still need to pay off all of my debt. It just makes me want to give up.”

The main source of his financial frustration is a $20,000 debt load. Half of that is from student loans and the rest of it from what he calls “stupid” consumer debt, including four maxed-out credit cards.

The debt has forced Mr. Lem, who runs a small business as a videographer, to move back into his parents’ Bolton, Ont., home. Looking ahead, he knows he won’t be in the same boat as his father, who he says has worked at the same company for 25 years and can retire at the age of 58.

“I don’t have a pension plan,” Mr. Lem says. “And I would love to put $100 a month into an account that I won’t touch until I am 60, but that $100 is paying off the interest rates on four credit cards and my student loan.”

Young Canadians, a generation saddled with record high student debt and facing an expensive housing market, tight job prospects and stalled earnings, are still absorbing news that they might need to work two years longer than their parents.

The latest Conservative federal budget calls for the eligibility age of OAS and the closely tied Guaranteed Income Supplement to rise from 65 to 67, over a span of six years starting in April, 2023.

What that means is that if you are 54 or younger and decide to retire at 65, you’ll be getting $13,000 less. Not everyone qualifies for the OAS benefit: If you earn more than $69,562, you must repay some of it. If you make more than $112,772, the full amount is clawed back.

So what steps can low-to-middle-income earners, like Mr. Lem, take to adjust their financial plans?

Caring for Clients financial planner Rona Birenbaum has stopped incorporating OAS into the retirement projections of anyone under the age of 40 – in part because she believes it could be clawed back further.

“As a conservative approach, we are now taking it out entirely,” Ms. Birenbaum says.

The maximum amount Canadians can receive in OAS is $540.12 a month, which works out to more than $6,000 a year. “That can make a big difference in a retired person’s life. So taking this out of retirement projections, it is no joke,” she says.

The solution to the OAS cutback is simple: Young Canadians need to save more. “It means reviewing your cash flow and finding ways to allocate more of your income toward reducing debt and saving for retirement,” she says.

The challenge, Ms. Birenbaum says, is that younger Canadians are “a demographic that loves to live well, that will live longer and will be more responsible than ever for funding their retirement lifestyle,” she says. “I don’t think it is a panic situation, but it requires some focus on planning.”
Today’s twenty- and thirtysomethings don’t believe the government is going to take care of them in their old age, Ms. Birenbaum says.

“I have had more young people approach me for financial plans than ever in my 20-year career. These are people in their late 20s and early 30s who want to make good decisions now and are not willing to wait until they are 55 and hope for the best.”

Malcolm Hamilton, an actuary at Mercer Human Resource Consulting and an expert on Canadian retirement saving, says that for most people, the changes are not crushing. “As retirement events go, this is more a tremor than an earthquake.”

What it means, is that anyone under the age of 54 who wants to retire at 65 and replace the missing OAS benefit, will need to save an additional $13,000, he says. For someone who earns $50,000 a year, for instance, that translates into an extra three months on the job.

Low-income earners, those who do not make enough during their working lives to save for retirement and rely on government benefits like OAS, will be most affected.
“People in this category, it means their lives will not become pleasant until 67 instead of at 65,” Mr. Hamilton says.

Tina Di Vito, the head of BMO’s Retirement Institute, says the best thing young Canadians can do is to get informed, start thinking about where their retirement income will come from and if possible, set aside even small amounts at an early age.

Ashley Winsor, a 32-year-old Labrador native who now calls Fort McMurray, Alta., home, is not expecting the government to prop him up in his golden years. “I feel that I will need to actively save if I want to retire at a decent age,” he says.

Mr. Winsor, a shuttle-bus driver, and his wife are almost debt-free and want to get their retirement plan on track before they start a family. “I want to make sure that when we do decide we want to retire, we can live comfortably without having to rely on the government system, because who knows if that will be around when I am in my 60s.”

What young people can do right now to get their retirement on track
Tina Di Vito, the head of BMO’s Retirement Institute and the author of52 Ways to Wreck Your Retirement, has these six suggestions for young people wondering how to set themselves up for their golden years:

1. Contribute early Contributing $5,000 every year – growing at 5 per cent a year over a 30-year period – will build to nearly $350,000. Total contributions of $150,000. (The same annual contribution of $5,000 and return of 5 per cent over only 20 years grows to approximately $174,000 with $100,000 of contributions.)

2. Set up automatic payments The change in OAS means Canadians will receive about $13,000 less. So a 25-year-old will need to save an additional $325 annually. The sensible way to save is through smaller, regular contributions (rather than a lump sum). Set up monthly payments of approximately $30 a month.

3. Educate yourself about your employee pension plan It is more important than ever to understand and take advantage of employee retirement plans. Many workplace pension plans offer various options, such as employee matching programs, or features like automatic enrolment and auto-escalation of contributions.

4. Balance debt repayments with savings plans If you have a lot of high-interest debt like student loans or credit cards, it’s best to pay those off first. If debt is manageable and low-interest, like on a mortgage, balance your budget between saving for retirement and debt repayment. Paying down your debts should be the priority because once you are debt-free you can allocate the extra funds to retirement savings.

5. Remember tax-savings strategies OAS is a taxable pension benefit. As an alternative, contribute the maximum amount of $5,000 a year to a Tax Free Savings Account. According to a BMO study, the average TFSA contribution is $3,700. Upping the amount over a 10-year period gets you another $13,000, equal to that $13,000 OAS loss.

6. Keep in mind where you live To be eligible for OAS, you must be a Canadian resident for a minimum of 40 years after 18 years of age. A few exemptions apply. If you have an opportunity to travel or work abroad, keep in mind how many years you will have been a Canadian resident before retiring if you plan on receiving OAS benefits.

Protecting Your Business

If you own and operate a small business, you need to think about what would happen if you were suddenly unable to perform your responsibilities.

Like a lot of small businesses, your business is probably incredibly dependent on you. Your top- to- bottom knowledge and above-average time commitment would make it very difficult to replace you. In the extreme, your business might need to find a successor or be sold.

In the meantime, the company might not be able to conduct itself in its usual fashion, missing opportunities and potentially creating losses that would need to be financed.
Having a life or disability insurance policy to protect your spouse or family in the event you could not contribute in the usual fashion is commonplace. You should give that same consideration to your business.

One way to do that is through key-person insurance.
Key-person insurance (commonly referred to as key-man Insurance) is a life or disability policy placed on the owner, director or employee of a company who is crucial to the business, where the business or a related party (such as a shareholder or lender) is the beneficiary. Such a policy would provide funds to your business to give it time to react to your absence. It could be used to pay off debts (as a lender might insist on) or finance losses.

While it seems fairly practical, it’s not free. Policy costs will likely mirror similar coverage on the personal side but who, how and when it would pay out out is a little more complicated. Why? Taxes. Not surprising, is it?

The deductibility of insurance premiums and taxability of benefits is highly dependent on the type of coverage and the type of payout and beneficiary. It’s not a foregone conclusion that the business would pay the premium. It might be more efficient to pay it personally – again, depending on who the beneficiaries are and how the benefits are paid.

If you have a simple small business, you probably just need a simple key-person policy. Insurance agents who specialize in such policies would be a good bet to turn to, as they likely know the ins and outs and standard structures. A quick call to your accountant never hurts. Your lawyer can probably sit this one out.

Where possible, insure and pay for your personal life policies personally and insure and pay for your key person insurance corporately, and keep it as simple as your business structure allows.

More important, don’t put it off. Think of how hard you have worked and what resources your business would need to deal with your unexpected departure. You wouldn’t want it to fail due to lack of planning, nor burden your estate or employees with an overwhelming challenge.

I wish this advice would add to your bottom line in the short term. It won’t. But it’s the right thing to do when considering the long-term value of a business you have worked so hard to build.

60% of Canadian Retirees are in Debt

More than half of retired Canadians hold some form of debt which may cut into their retirement plans and cash flow, a new poll suggests.
According to the survey conducted by Harris Decima, 59 per cent of retired Canadians are currently in debt, compared to 76 per cent of non-retirees.

The CIBC, which funded the survey, says the results highlight the need for Canadians to have a good debt repayment strategy, especially as they approach retirement. That's because fixed incomes make it more difficult for retirees to pay down their debt.

“While retired Canadians carry less debt than the national average, their debt could be stagnant and may end up costing them more in interest costs over a longer period of time,” said Christina Kramer, executive vice president of retail distribution and channel strategy at the CIBC.

“You really have to think about the debt you are retiring with because the regular repayments you make will directly affect the discretionary income you have.”

That's because for retirees, who have fixed incomes, all monthly payments must come from retirement savings or pension earnings. This can affect how much money they have left to cover their day-to-day expenses.

Only 27 per cent of the retired Canadians surveyed say they have made an extra payment towards their debt in the last 12 months, compared to 42 per cent of non-retired Canadians.

On average, retired Canadians carry 1.65 debt products with a balance, such as mortgages, lines of credit, loans and credit cards. In contrast, non-retired Canadians carry 2.64 products with a balance.

The percentage of retired Canadians with debt was highest in Atlantic Canada, at 76 per cent. All other regions hovered just below 60 per cent.

The telephone poll of more than 2,000 Canadians is considered accurate to within 2.2 percentage points, 19 times out of 20.

A survey released in the spring suggests that being debt-free is key to the idea of a successful retirement for nearly nine in 10 Canadian homeowners.

The dream of being debt-free was more important to the roughly 2,000 respondents than living near family, keeping busy with a hobby or volunteer work or having a broad group of friends.

Only having good health was listed by more people, according to the survey conducted for Manulife Bank.

Kramer recommends working with a financial advisor to plan out how to best repay your debt. She also suggests setting your debt payment slightly higher than the required payment to reduce overall interest costs.