Fighting the new ‘normal’

Jonathan Chevreau, Financial Post · 

The topic of a “normal” retirement age is getting more than usual media attention lately because of the increasingly violent French protests about pushing theirs back to 62 from 60. Pity hard-working Germans, who retire at 65 but are being asked to wait until 67.

In the United States, normal retirement for Social Security purposes is already 67 for those born after 1959 [66 for those born between 1943 and 1954; 65 if born before 1938], but early reduced benefits can start as early as 62. Even then there are fears it can remain viable once the Baby Boomers retire en masse.

Here in Canada, there is no longer a mandatory retirement age. Until various provinces removed it, many otherwise willing workers were forced out the door at 65. That’s still considered “normal” retirement age by employer pensions. It is also the age Old Age Security benefits commence and the usual age to start receiving Canada Pension Plan (CPP) benefits.

True, you can take CPP as early as 60 (with reduced benefits) and many employers provide “early” retirement on their pensions, especially public sector defined-benefit plans. That’s the only place the pipe dream of Freedom 55 becomes reality, outside London Life commercials (or its successor, Freedom 55 Financial).

You can also delay CPP benefits to as late as 70. There will be more incentive to do so once new rules are fully in place in 2016. Early

CPPers once took a 30% benefits cut, while late CPPers got a 30% benefits sweetener (relative to taking it at 65). By 2016, taking early CPP at 60 will mean reducing benefits by 36%, while postponing it five years (to 70 from 65) will boost it by 42%.

BMO Retirement Institute director Tina Di Vito says the maximum monthly CPP benefit will be $1,326 for those who wait until 70, plus inflation adjustments. Compare to Social Security, which pays US$1,790 for those waiting till age 67 and US$2,370 for those who wait till 70, according to Vancouver-based financial advisor Adrian Mastracci.

BMO has released a report — When to Retire, Age Matters — that may cause Canadians to emulate Germany and keep working as long as possible. This is counter to a brief vogue when Canadians sought earlier retirement. In the 1970s, the median retirement age was 65, which fell to 60.6 by 1997. But it edged up to 61 in 2005.

Most public-sector workers can retire in their mid to late 50s, while those in the private sector keep going well into their 60s. No surprise that, as pension consultant Greg Hurst notes, 85% of public-sector workers have employer pensions, versus 25% for private-sector workers.

This is why the pension-less must save as much as possible inside RRSPs and TFSAs. But as financial planner Jim Otar shows in his books, private savings can soon be depleted, either by bear markets like 2008 or by withdrawing at too high a rate.

BMO ran a scary chart showing how $250,000 in an RRSP performs if you fully retire at age 55, semi-retire at 55 or keep working till 65. They assume conversion to an RRIF with withdrawals of $25,000 a year, taxable at 20%, investment growth of 6%, 2% inflation and life expectancy of 90.

Those who start drawing down an RRSP at age 55 run out of money by 65 (although OAS would then kick in and GIS if no other pension or investment income). Those who postpone withdrawals or keep adding to the RRSP run out of money much later or not at all, if markets co-operate.

Note the implied 10% withdrawal rate is more than double the “safe” rate of about 4% (adjusted to inflation) suggested by U.S. financial planner William Bengen. The only failsafe retirement plan is to “just keep working,” preferably adding to savings throughout rather than depleting them. This not only reduces the number of years money must last, but lets you save more and gives portfolios more time to grow.

Also, the longer you wait, the better your pension payouts, whether from employers or government. There are several proposals to broaden pension coverage, most based on enhancing the CPP.

Ms. Di Vito agrees with Morneau Sobeco actuary Fred Vettese, who argued in a paper that the simplest fix would be to raise — perhaps double — the base annual earnings on which CPP is calculated. Currently, it’s around $47,000. Doubling it to $94,000 would almost double benefits but not the required contributions from employees and employers.

Do that and Europeans will be directing their pension envy to Canadians.