The new rules of retirement

A closer look at the financial repression facing your nest egg

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From the September/October 2016 issue of the magazine.

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If you’re anything like my dear departed father, you may not need to read any of my new “Retired Money” columns, which are dedicated to solving money management challenges for retirees. You see, my dad was an Ontario high-school teacher and the fortunate beneficiary of the famous defined benefit (DB) teachers’ pension plan.

He didn’t need to worry about investing—he owned only GICs and would proudly declare that he didn’t know a stock from a bond. Unlike you, dear reader, he didn’t need to. With a paid-for home, his GICs, teacher’s pension and government CPP and OAS, Dad was laughing in his classic “do-nothing” retirement. He could take long walks, read to his heart’s content and entertain neighbours with glasses of sherry. Oh, and cheer for the Montreal Canadiens.

His two sons, and readers of their generation, may be less fortunate. For starters, only a minority of workers enjoy the kind of inflation-indexed guaranteed pension that Dad—and his widow—enjoyed. Second, most of us would be lucky to generate 2% a year if those GICs were held today, versus 5%-plus a generation ago. Third, while Dad lived to 87, today’s retirees should worry about longer life expectancies. Longevity is both a blessing and a curse. If you have good genes and a healthy lifestyle, your increased long life means you may be negatively impacted by the new normal of low interest rates and the lack of a real pension for life. You have a better chance of running out of money before you run out of time.

A fourth wrinkle in your fortune is inflation. It’s low and appears innocuous now but remains an inevitable and insidious destroyer of wealth and purchasing power. The longer you live, the more inflation will degrade the quality of any retirement nest egg you have managed to construct.

retirement planningIt’s a terrible pity that modern employers are loath to offer the kind of DB pension my dad enjoyed. This is why the Liberal government and all provinces but Quebec saw fit to “modestly” expand the Canada Pension Plan. Too late for those already or nearly retired but for today’s young people, an expanded CPP will be the closest thing to the pension my father enjoyed (not as good, but close).

Even after CPP is fully expanded, it will cover off only about a third of your working income (a rise from 25% of pensionable earnings which it has been doing). To generate the rest of the income needed, it will be necessary for you to read publications like this one and take responsibility for learning about investing. When companies shed DB pensions or no longer make them available to new hires, they are dumping responsibility for your financial future from their own shoulders onto those of their employees.

Low interest rates and inflation can be blamed on government, by which I mean the world’s central banks (including Bank of Canada) that dance to the tune of the mighty U.S. Federal Reserve.

It’s a shame about declining pension coverage but it’s a downright crime what governments are doing to savers. Far from encouraging us to save, those same low rates continually tempt consumers to go deeper into debt. You can be a saver, sure, but you’ll pay for it. As retired actuary expert Malcolm Hamilton told me, “We have a crisis with central bank policies and negative interest rates, which makes saving [outside tax shelters] more or less futile.”

Interest income is taxed at the top marginal rate, higher than “risky” assets like stocks. Investors whose main wealth is in RRSPs, TFSAs and non-registered investments are caught between the rock of minuscule (or even negative) interest rates and the hard place of risky stocks, which at today’s nosebleed valuations could severely correct at any moment.

There’s a phrase for this war on savers: financial repression. It’s a travesty, but I do not see this changing in what’s left of most of our lifetimes. How to cope with it will be the raison d’être of this column. There’s never been such a strong need for help in handling your investments in retirement, to fight back against the repression. “Retired Money” will make that fight its mandate, while also looking at semi-retirement because, sadly, many of us will not be able to afford the “Full Stop at 65” my father enjoyed.

Jonathan Chevreau is the Founder of the Financial Independence website and co-author of Victory Lap Retirement


8 comments on “The new rules of retirement

  1. Maybe its me but it seems the tone of this author moves from smug to helpless with great regularity. I retired at 55 at less than 30% of my former income. No debt , small pension ( Yes we decide if we want one when we plan our careers) some savings and an understanding of impulse control. I am grateful everyday . We are better educated than our fathers, we have investment accounts and math models that tell us what we need. We saw our parents deal with 17% interest rates and have eschewed debt. We are free. Long live Canada.


  2. Tough to agree with this. What the writer omits is the simple fact of continuous saving from a young age. Whether this happens within a DB pension, DC pension, RRSP, TFSA (unavailable to his father) is largely irrelevant. The govt ‘sponsors’ all of us with 18% that can go into pension or RRSP. No advantage to a pension as RRSP room is reduced by pension contribution. We all have $5500 of TFSA room. If an employer matches contributions – this is a great advantage. If u have a small business, innumerable tax advantages come your way. If you save well and want a set payment – buy annuities. Pay off your debt and your house as his father did. This will take dedication and commitment. And you will live a happy productive retirement. If you think you will live longer, save more. But start getting healthy. If you have hypertension, diabetes, family cancer history in your 50’s; let’s face it- u don’t need to worry about funding life to 100. Save diligently. Use the tools available to you. And enjoy.


  3. I agree that “It’s a shame about declining pension coverage but it’s a downright crime what governments are doing to savers.” The problem is that for the last few years the system had been rewarding debtors and penalizing savers. Where have our values gone?

    Insofar as “It’s a terrible pity that modern employers are loath to offer the kind of DB pension my dad enjoyed”, it may be a pity but the employers are doing it for reason. Plain and simple: Employers can’t afford defined benefit plans no longer. Neither can governments but politicians are kicking the can forward instead of putting a stop to government defined benefit plans. Presently, the City of Los Angeles pays over a third of their revenues out to workers who no longer work for them due to their pension plans. It’s a matter of time before more and more cities and states and provinces go bankrupt due to the pension plans they can’t afford.

    The bottom line is that it is a fantasy that even 50 percent of the population can retire with a great retirement income (say $50,000 a year or more) and live for 30 years in retirement. There has to be production by others to support this, which there isn’t and will never be. So in the future there will be a small minority that has a great retirement income and a large majority with a not-so-great retirement income.


    • Ummm…so not sure if the $5500 TFSA is going to carry me into my retirement years…thank you Justin…the $10,000 was certainly more on track to help. I have no company pension and have saved diligently all my life. I have a paid for home and live modestly…in my eyes. I have worked in the corporate world for my entire life and would be retired now if I could have enjoyed a company pension. One thing is for sure…we certainly spend our winters cheering for My Habs…and we travel from Toronto to Montreal or Buffalo when they play there, to watch out team play. Good way to spend retirement income dont you think!


  4. WOW…With that type of money I figure I would be good till I am 152 years old…with 3 wives and 5 girl friends. Please be more realistic.


  5. Too much unnecessary doom and gloom in this article. Invest in blue chip stocks that have a long history of paying increasing dividends on a regular basis (ex. Canadian banks have been doing this for generations), place them in a self-directed investment account so you’re not paying fees (hidden and otherwise), and reinvest the dividends. Check out Derek Fosters books to learn more on how to do this. If you start young enough or invest enough money, you can live off the dividends (as he did by the age of 35), without worrying about the movement of the stock price.


  6. With regard to the graphic, “How much you needed then and now” – this is the problem with an income only spending approach in retirement. You don’t have much to spend and you die with a big bunch of cash. You should use a cash flow/total return approach which aims to spend down the capital over 30 years or so, using well known guidelines so you will not run out of money and have more to spend in retirement.


  7. “It’s a terrible pity that modern employers are loath to offer the kind of DB pension my dad enjoyed. ” I couldn’t disagree more. Why should employer’s be saddled with the onus of having to provide a guaranteed income. They are already providing you with the opportunity for a steady income. People need to take some of the responsibility and take care of their own lives and financial matters.


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