Our experts share their thoughts

Read what our experts think about various aspects of financial planning for retirement.

Should personal savings be emphasized and employer pension plans ended? This question is on nearly everyone's lips these days, especially for members of a pension plan having financial problems. Yet the answer is clear: NO!

Nothing beats a pension plan offered by an employer!

It's unfortunate, but financial planning for retirement is often an afterthought. Most Quebeckers do not know how much they will need to save for retirement. Are they planning blind? Are they saving enough?

Contributing to a pension fund forces you to save systematically. And since the employer also makes contributions in most cases, the amount saved increases quickly. In addition, group savings

  • deliver better returns than personal savings
  • provide immediate tax benefits through payroll deductions
  • have preferential management fees.  

Understanding your pension plan is important but not necessarily easy.

This being said, you always need to know where your money's going. Take the time to review your statement of benefits. You could be in for a surprise! You may find that you need additional savings. For most of us, public plans do not provide enough to maintain your standard of living in retirement.

Everyone retires. So you may as well as take advantage of all the savings vehicles available to ensure you can retire comfortably.

You hear it over and over: saving early pays off! But does that really apply to retirement?

Yes, through the magic of compounding!

There are many examples of how compound interest works. The case of Stephanie and Fred provides a particularly persuasive one.

Stephanie saves 1 000 $ a year for 10 years from age 25. She stops saving at age 35 but lets interest compound on her capital. Her total investment is therefore 10 000 $.

Fred starts saving 1 000 $ a year for 25 years from age 40. His total investment is therefore 25 000 $.

Assuming a 5% rate of return, Stephanie will have accumulated 7 000 $ more than Fred at age 65. It's the magic of compounding in action! Amazing, no?

Financial planning for retirement is far from a priority for many. And if truth be told, it requires a great deal of effort. As any marketing executive will tell you, it's not a very "hot" topic! Combined with the low interest rates, it's no surprise that planning is given short shrift.

And yet, interest rates should not be a roadblock to saving. There's more than one way to save for retirement.

The message bears repeating: you do not need to save for retirement in an RRSP or TFSA. While it is true that any actuary involved in financial planning for retirement would prefer to see you invest in true retirement savings vehicles, you can choose to invest in real estate or equities. The important thing is that you save!

Looking for the winning formula? Every situation is unique! One thing's for sure, even if interest rates are low today, it is still a good idea to save up your capital. When interest rates bounce back, you'll be able to max out your investment income.

It's not always easy to find your way. Here are five tips to help you plan your retirement:

  1. Don't save blind. Plan regularly with SimulR or the tool of your choice, especially if your income or retirement plans change.
  2. Here's an example to illustrate my next tip. From age 25 to 35, Stephanie saves 1 000 $ a year. Fred starts saving at age 40 and saves the same annual amount until age 65. Stephanie therefore invested 10 000 $ and Fred 25 000 $. At age 65, Stephanie will still have 7 000 $ more than Fred through the effect of compounding. Amazing, no? You may already have guessed my second tip: save early!
  3. When it comes time to save for retirement, opt for registered investments. In the long term, registered investments such as RRSP or a TFSA deliver greater returns because of their tax benefits. In addition, it is less tempting to use the capital in an RRSP for purposes other than retirement, since withdrawals are taxable.
  4. If you are lucky enough to have a private pension plan, check what it will pay you in retirement. Make sure that amounts from your plan will be sufficient for you to maintain your standard of living. Otherwise, plan for additional savings. Read your statement of benefits carefully: it provides a wealth of information.
  5. Remember inflation! The increase in the Consumer Price Index must be taken into account in your retirement planning. For example, a litre of milk will cost much more in 15 years. Most financial planning tools take that into account. SimulR assumes a 2,5% increase.

If planning your retirement befuddles or intimidates you, specialists are there to help. You see a doctor if you feel sick, so why not see a financial planner for the cure to your financial worries?

With an aging population and an expected increase in life expectancy, managing longevity risk is becoming an increasingly bigger challenge. Evaluating its consequences is therefore essential, especially with regard to planning for your retirement.

Here is a look at what life expectancy really is. Life expectancy provides a measure of the average number of years an individual is expected to live, based on the year of your birth or a given age. Life expectancy may be estimated according to two different methods:

  • period life expectancy is the most common method and measures the mortality rates observed during a given calendar year or a given period;
  • cohort life expectancy measures the mortality rates of a group of individuals born in a given year over the course of their lifetime.

Period life expectancy

Period life expectancy summarizes the risks of death all the age group was exposed to during the same given time period. The indicator makes comparisons easier between territories or historical periods.  It is the most frequently used demographic data.

Cohort life expectancy

Cohort life expectancy measures a given cohort's actual mortality rate. However, to determine a given cohort's life expectancy with certainty, all the individuals who made up the cohort must be deceased. Therefore, calculating life expectancy in this manner is more complex and can only be achieved retrospectively. The cohort method summarizes the mortality rate of a group of individuals born in a given year over the course of their lifetime. This method takes into account the improvement in survival rates, which generations have benefited from or could benefit from during their lifetime. That is why we sometimes refer to this indicator as increased life expectancy. Cohort life expectancy is generally higher by a few years than period life expectancy.

Financial planning for your retirement

One of the main challenges in financial planning for your retirement is to determine the number of years your long-awaited retirement will last. Life expectancy at age 65 provides a good estimate of the average number of years you could spend in retirement and for which you will need sufficient funds.

The following table shows that, Québec in 2016, life expectancy at age 65 was 23.8 years for women and 21.0 years for men. In 2065, it should reach 26.5 for women and 24.2 for men.

Life expectancy (in years) of Quebeckers at various ages, including mortality risk reduction for posterior years

Men
Age201620402065
60 25.627.828.8
65 21.023.124.2
70 16.618.519.6
75 12.714.215.2
80 9.310.311.0
90 4.54.75.0
100 2.32.42.6
 Women
Age201620402065
60 28.530.131.2
65 23.825,426.5
70 19.320,821.8
75 15.116,517.3
80 11.312,413.1
90 5.66,36.7
100 2.62.93.2

According to the life expectancies indicated in the table above, a man aged 65 can expect to live until age 86, whereas a woman can expect to live to age 89.

The more an individual ages, the more his or her life expectancy increases. Therefore, according to the period mortality table, individuals who have already reached age 65 can aspire to a higher life expectancy than the one they had at birth.

Therefore, when you plan your retirement you should aim to have income until at least those ages.

Unfortunately, a large proportion of Quebeckers underestimate their life expectancy, which shows in the financial planning of their retirement.

Life expectancy: an indicator representing the entire population of Québec

Being able to rely on life expectancy would make planning for your retirement much simpler. However, survival probabilities show that about 50% of the Québec population will live longer than their life expectancy and more than 1 out of 10 people will surpass the indicator by more than ten years! That is good news only if you have planned for sufficient income to meet your needs throughout your retirement. If not, you will have to set up measures to face the financial risk that comes with longevity.

Longevity risk corresponds to the financial risk associated with living a life that lasts longer than you expected, therefore outliving your savings.

Charlotte, for example, will turn age 65 in 2020. She based her retirement plan on her life expectancy to make sure that she would have a proper income for 24 years, that is, until she turns age 89. She therefore has enough savings to maintain her lifestyle for an average life expectancy. There is, however, something that she did not realize: she has a fifty fifty chance of not having enough money saved! To be fairly certain that she does not end up in that situation, Charlotte should have had enough savings to last until age 110. The sum of her retirement assets should have been enough to provide income for 45 years.

As demonstrated in our example, exorbitant savings are needed to eliminate longevity risk completely. However, you can decrease it without having to make too many concessions. Here's how:

  1. Plan your retirement savings properly

    • A good preventative measure consists of "hoping for the best, but planning for the worst".
    • You need a plan to accumulate assets, but also a plan to withdraw them.
    • As your retirement projects become a reality, your financial plan must be followed closely and adjusted. Should something unexpected happen, the pace of withdrawal of your assets must be adjusted rapidly to limit the adjustments necessary to maintain the projected withdrawal period.
  2. Make sure that you estimate your life expectancy accurately

    • Remember that life expectancy has increased over the last decades; we can live over age 80!
    • Look at cohort life expectancy or life expectancy including mortality risk reduction after the year indicated to get a realistic idea.
    • Take into account your actual age instead of looking at the life expectancy at birth, which includes death risks you were exposed to at a younger age. It is important to know that as a person ages, his or her life expectancy increases.
    • Adapt the general life expectancy with your lifestyle and your relatives' age at their time of death. It is realistic to think that you could live at least 5 years longer than your parents did.
  3. Choose the right time to retire to obtain maximum benefits

    • The Québec Pension Plan (QPP) and the Old Age Security (OAS) program let you put off your payments and therefore get higher amounts for the rest of your life. As a result, you will receive a higher pension amount even if you live up to 45 more years. Putting off the time at which you begin receiving your benefits is one of the most effective ways to make sure that you have a minimum income until the day you die.
    • Several supplemental pension plans (SPP) also allow you to increase the amount of your benefits in exchange for the postponement of your retirement.
    • Postponing retirement can also make up for a lack in past personal savings. For each additional month of postponement, the savings period increases and the withdrawal period decreases. Some people can greatly improve their financial comfort in retirement by postponing it by one year. Working one additional year may seem like a long time, but do not forget that you can retire gradually by reducing your working hours.
  4. Convert part of your savings to life annuities

    • In exchange for a premium, insurance companies offer life annuities. The payments are predetermined and paid until death. They eliminate longevity risk on a portion of your income.

In our society, the cost of goods and services has a tendency to increase every year. This is what we call inflation. Inflation has a direct impact on your buying power. When prices increase, your buying power decreases. However, your buying power increases when prices decrease. To maintain your buying power, you must take inflation into consideration.

Inflation is usually measured using the consumer price index (CPI), which is set by Statistics Canada using a basket of consumer goods and services. The index allows us to estimate the average price variation of goods from one year to the next.

For example, in Québec, the CPI increased from 129.7 to 132.6 between June 2018 and July 2019. The inflation rate was therefore 2.2% ((132.6 – 129.7) ÷ 129.7 = 2.2%).  It usually varies between 1.0% and 3.0% per year.

The following table shows the future cost of $10 000 in buying power, calculated using different inflation rates over three decades.

Cost of $10 000 in buying power according to inflation rates and the number of years
Inflation rate10 years 20 years 30 years
1.0% $11 046 $12 202  $13 478 
1.5% $11 605  $13 469 $15 631 
2.0% $12 190  $14 859  $18 114 
2.5% $12 801  $16 386 $20 976 
3.0% $13 439  $18 061  $24 273 

As a result, with a 2.0% inflation rate, if you spend $10 000 per year, making the same purchases in 10 years will cost you $12 190.

In the last decade, the annual inflation rate has always been under 3.0% and, according to specialists, it should remain around 2.0% in the long term. Although it seems unlikely that it should reach 11% like in 1980, it could be possible.

Annual indexation of the pensions under the Québec Pension Plan

When a value is adjusted according to an index or reference rate, it means that it is indexed. Generally, retirement income that comes from personal savings is not indexed. Consequently, its buying power decreases over time.

However, pensions paid under the Québec Pension Plan and the Old Age Security Program, as well as the Guaranteed Income Supplement are indexed according to the consumer price index (CPI).  The pensions are indexed for beneficiaries to maintain the same buying power over the years.

The indexation rate of benefits under the Plan correspond to the percentage of adjustment of the amounts paid to beneficiaries. The indexation rate is set in January in accordance with the average CPI, which is calculated using data published by Statistics Canada for the 12-month period ending on 31 October of the previous year. The annual average corresponds to the Québec Pension Plan pension index.

For example, from 2018 to 2019, the QPP pension index increased from 130.0 to 133.0. This means that the pensions' indexation rate for 2019 was 2.3% ((133.0 – 130.0) ÷ 130.0 = 2.3%). However, if, for a given year, the pension index were lower than the year before (deflation), the pension amounts would remain the same.

Indexation rate of pensions under the Plan according to the year
 YearIndexation rate (%)
2019 2.3
2018 1.5
2017 1.4
2016 1.2
2015 1.8

Summary

Inflation is a key factor to consider when planning your retirement withdrawal strategy. Part of your savings is protected: your pensions paid under the Old Age Security Program and the Québec Pension Plan, for example. As for the remainder, you have to plan enough savings to counter inflation and maintain your buying power.  

A rate of return risk is associated with the uncertainty of investment income. However, there is no risk if your return on an investment is certain. For example, if you put $10 000 under your mattress for a year, there will be no return on your savings. You are therefore not taking any risk. On the other hand, if your investment of $10 000 could give you a $500 to $1000 return after one year, there is uncertainty related to the return on your investment, which is the notion of risk related to rate of return. Thus, the risk is not only associated with a loss: it is related with possible variations of income from investments.

A rate of return risk is an important element to consider when preparing for your retirement. Preparing financially for retirement requires putting money aside now, to use later. The money you save is often invested in financial products that allow you to complement your savings with investment income. If you planned your retirement thinking that you would receive $1000 from your $10 000 investment, but you only received $500, you have not lost any money, but you may be in bad shape financially!

There are three ways to manage risk related to rate of return: avoid, transfer or control.

  1. Avoiding risk

    If you don't invest your savings, you avoid any risk related to rate of return. However, it also means that you are not receiving any investment income! Do you really have the means to deprive yourself of such income? That would require saving even more to achieve the same savings goal. Investing your savings increases its effectiveness. Investment income allows you to accumulate more money or make your savings last longer when you withdraw assets. Therefore, it is not recommended to completely avoid rate of return risk.

    The table below illustrates for how long, according to different annual rates of return, it is possible to withdraw $1000 per month on an initial capital of $120 000

    Maximum withdrawal period according to different annual rates of return

    • An annual rate of return of 1%, allows you to increase the amount of your initial capital by 6 months.
    • An annual rate of return of 5%, allows you to increase the amount of your initial capital by almost 4 years.
    • Investment income allows you to accumulate more money or make your savings last longer when you withdraw your assets.
    Annual rate of return How long $120 000 in capital lasts when $1000 is withdrawn every month
    0%10.0 years
    1%10.5 years
    2%11.1 years
    3%11.9 years
    4%12.7 years
    5%13.8 years
    Note that...

    A fixed-term investment vehicle with a guaranteed return, such as a guaranteed investment certificate (GIC), allows you to avoid rate of return risk only over the term of the investment, that is, over a one-, two-, five-year term etc. However, your retirement and withdrawals must be planned over a number of years. When a GIC matures, the rate of return of the new certificate you want to buy will not necessarily be the same as the rate of the certificate in which you originally invested. Future returns are therefore uncertain.

  2. Transferring risk

    Transferring rate of return risk means using savings vehicles where the risk is covered by a party other than yourself. For example, the Québec Pension Plan (QPP), which covers all Québec workers, does not have a rate of return risk for its contributors since the risk is borne by the all those who contribute to the plan. Contributing under a defined benefit pension plan is also a good strategy for transferring risk, since the risk is assumed by the employer. In addition, it is possible to buy a life annuity (payable until death) from an insurance company so as to protect against the risk related to the rate of return associated with withdrawals.

    These savings vehicle also have the advantage of offsetting:

    As a result, amounts that are invested significantly reduce the risk related to your retirement savings. However, remember that those savings vehicles do not protect against liquidity risk, an aspect to consider when financially planning for retirement.

  3. Controlling risk

    It is not everyone who can or wants to transfer a rate of return risk. Certain employers do not offer defined benefit pension plans and certain people prefer to keep a portion of their assets invested in more traditional savings vehicles, thus allowing themselves to be better equipped to face liquidity risk. Under these circumstances, controlling the risk is the best option for managing rate of return risk.

    To do so, you can choose the level of risk that suits you best according to your investor profile. A financial advisor authorized by the Institut québécois de la planification financière can help you determine your investor profile and provide you key investment advice. Note, however, that your investor profile is not static: it evolves over time. It could be easier to accept the risk associated with rate of return if you are young and still 20 to 30 years from retirement. However, the risk may seem less and less reasonable as you get closer to retirement or start to withdraw your funds. For that reason, it is a good idea to review your investor profile periodically.

    Furthermore, to better control the rate of return risk, investors are recommended to diversify their investments, that is to say, not to put all their eggs in one basket! Generally speaking, bonds and GICs represent a lower rate of return risk, whereas shares or other investment products listed on the stock market are higher risk. Diversifying your investment products allows you receive a more stable rate of return.

In short...

Unless you place your retirement savings under your mattress, a rate of return risk is inevitable! However, you can transfer those risks, for example, by waiting longer to apply for your pension under the QPP or your employer's defined benefit pension plan, or purchasing a life annuity from an insurance company. Another strategy to counter such risk is to control the level of the rate of return risk that fits your current investor profile and with which you are comfortable.

Investment objectives and strategies vary from one person to another; it is up to you to make the decisions that are right for you and plan for your retirement with strategies that best suit your situation. Finally, don't forget that, in addition to using Retraite Québec's online tools, you can speak to specialists, such as financial planners, to help you achieve your objectives.

A liquidity risk is related with your ability to ensure the availability of funds to meet your short term needs. An example of such a risk is when you invest a large sum of money to meet your long term obligations without having the liquidity needed to meet your immediate needs. In such a case you could expose yourself to losses or getting yourself into debt.

During your retirement, the risk related to liquidity is closely linked to your retirement savings withdrawal strategy. That risk becomes particularly relevant if you are counting on an illiquid asset, such as your house, to plan your retirement income or if you outlive your personal savings.

How can you protect yourself against risk related to liquidity?

  1. Plan and implement a savings withdrawal strategy for your retirement

    Growing your personal savings is a crucial aspect of financial planning for retirement. However, planning its withdrawal is just as important!

    Once you retire, you may need additional income at times to pay for expenses, such as a new car, roof repair, or even that trip of your dreams. A sound strategy allows you to plan for adequate withdrawals of your savings to ensure you always maintain a level of income suited to your needs. It will also promote appropriate management of other retirement related risks, such as:

    • longevity, that is, the possibility that you outlive your savings
    • inflation, which could lead to a gradual loss of your purchasing power
    • rate of return, that is, the uncertainty associated with investment income.
  2. The age at which you apply for your retirement pension under the Québec Pension Plan (QPP) is a key element in your strategy since it could have an impact on each of those risks.

    Given that a retirement pension under the QPP is a monthly amount that you receive until your death, it provides you with a source of income for life. That income will be greater or lower depending on your age at the time you apply for your pension. If you wait until between age 65 and 70 before applying, the amount of your pension will be greater. That increase in your QPP pension resulting from the fact that you applied for your pension later reduces the risk that you will exhaust your personal savings if you live longer.

    Furthermore, your QPP pension is indexed annually, which protects against inflation and allows you to maintain your purchasing power year after year.

    Finally, as a QPP pension beneficiary, you do not have to shoulder a rate of return risk that you would for other savings vehicles, such as registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). Therefore QPP pensions are very advantageous in a number of ways.

  3. Prepare for the unexpected with an emergency fund

    Even if the withdrawal of your retirement savings is perfectly mapped out, unexpected events can occur. That is why you should keep money aside that you will only use in case of unforeseen events. The amount of the emergency fund will vary according to the degree of security you want and your financial capacity. If you wish, you can invest this amount to earn investment income, but you will still need to be able to withdraw it if need be.

  4. Keep an appropriate portion of your worth in liquid investments

    It is wise to invest part of your savings in liquid investments that allow you to withdraw at any time, with few to no penalties. However, that type of investment generally yields a lower return; therefore it is recommended to diversify your savings vehicles.

    In the case of term investments, you could stagger maturity dates, which allows you to have regular access to your cash. If when a bond matures you don't need the cash, you could reinvest it to increase your retirement savings.

  5. Use specialized products tailored to meet your needs

    You own a house and you are thinking about using this asset to finance your retirement? Several of options are available to you:

    • You could reduce the living space that you are using by renting out a part of your home, which would give you extra income
    • You could sell your house. However, be careful, this could take some time and you may have to accept an offer that results in a loss. You will also have to plan for a new home and the costs of that will have to be assessed
    • You can make an arrangement with your financial institution to cash in a part of your home's value while you continue to live there. This type of product allows you to compensate the lack of liquidity of immovable assets. Make sure that you are not charged high fees and interest and examine the requirements related to such a product.

    You will not necessarily spend in one go all of the amounts raised from the sale of your home or specialized products like reverse mortgages. If additional revenue is generated, you will need to plan the fiscal impact.

In a 2010 report, the Canadian Task Force on Financial Literacy defined financial literacy as "having the knowledge, skills and confidence to make responsible financial decisions." Over the past ten years, Question Retraite, a non-profit organization whose purpose is to promote financial security in retirement, has carried out a number of surveys that paint a dark picture of Quebeckers' financial literacy. Let's take a look at the situation using the various aspects of the definition.


Quebeckers think they are well versed, but...

Knowledge is the cornerstone of financial literacy. And yet, it is difficult to incite individuals to acquire knowledge on financial planning for retirement. This is especially true in the case of young people for whom retirement still seems a distant dream. The challenge is even greater given that a major portion of the population consider themselves sufficiently informed about the topic. However, the following numbers belie that belief:

  • 14% of unretired individuals aged 25 or older are unable to name even a single potential source of retirement income. The source named most often, registered retirement savings plans (RRSPs), was mentioned by a mere 55% of respondents.
  • 45% of workers aged 25 to 44 have no idea how much they need to save to maintain their lifestyle in retirement.
  • only 34% of workers aged 40 or older are aware of the approximate annual income they could receive in retirement.

Quebeckers say they lack financial skills

Although Quebeckers think they know enough about financial planning for retirement, many do not feel they have the required skills. Only 44% of workers aged 25 or older believe that they could plan for retirement on their own. Less than half of those surveyed said that they had asked for advice.

Moreover, Quebeckers aged 25 or over are prepared to hand over responsibility for their financial security in retirement, as only half those surveyed consider themselves to be mainly responsible for it. According to 39%, the responsibility falls to the government and 11% were of the opinion that the burden was on the employer.


Parents are an important source of information

Knowledge and skill generally help build the third aspect of the definition of financial literacy: self-confidence. The surveys carried out, however, revealed another factor can have a major influence. The future financial behaviour of children is primarily influenced by their parents. Although specialists, advisors, the media and other sources of information do in fact guide people to make sound choices and decisions, children will follow their parents' lead when it comes to taking concrete steps toward financial planning. Despite this, parents remain hesitant to discuss finances with their children. One-fifth of workers aged 25 to 64 stated that their parents often discussed money issues or personal finances in their presence. However, for 21% of those polled, such conversations only occurred occasionally.

The situation does seem to be changing for the better: 43% of those in the 55 to 64 year age bracket stated that their parents never discussed the subject in their presence. That proportion dropped to 19% amongst 25 to 34 year olds.


Being a know-it-all can be risky

A significant number of Quebeckers are not conscious of the risks involved with certain behaviours and seem to be little informed of the legislation designed to protect the population.

More than 40% of workers aged 25 to 64 feel that making their own investments involves a slight to moderate degree of risk. Some people are capable of making investments unaided, of course. However, the beliefs concerning knowledge and skills noted above cast doubt on those capabilities.

If presented with guaranteed extraordinary investment yields, more than half of those polled would ask for more information on the offer and 1% would jump at the chance lest it disappear. While 1% may seem minor, as a percentage of nearly 4 million workers, it amounts to a potential 40 000 people being scammed.


Raising awareness about financial planning for retirement is warranted

It is still not easy to convince people to adopt a preventative approach when it comes to financial planning for retirement. The percentage of people with no retirement income objective has been stagnating at roughly 70% for the last 10 years. Less than 40% of workers aged 25 to 64 put savings first and spend the rest, whereas 58% do the opposite. Despite this, Quebeckers are optimistic and confident about their retirement.

Educational messages still have their place in Québec. The trick is getting Quebeckers to listen to them.

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