“We are moving towards a situation in which society cannot afford to have us retire early, and will make it increasingly difficult to do so.” – Fred Vettese & (Finance Minister) Bill Morneau, authors of The Real Retirement, retirement gurus
In a recent post I told you I’ve been inspired and motivated by early retirement. In The Real Retirement, this goal seems to be more elusive than before, but this doesn’t mean Canadians are doomed for retirement. Actually, most Canadians with some sort of savings plan and with plans to work until age 65 are likely in decent shape. To understand why you might be better prepared for retirement than you think The Real Retirement walks readers through “the four pillars” of retirement income, gives you advice on some investing basics, and helps you arrive at your desired income target value. Let’s take a closer look at what Fred Vettese and newly appointed Federal Finance Minister Bill Morneau wrote about before I giveaway a copy of The Real Retirement to one lucky reader.
On understanding the four pillars of retirement income
- Pillar 1 is the Old Age Security (OAS) pension and its companion program, Guaranteed Income Supplement (GIS).
- Pillar 2 is the Canada Pension Plan (CPP).
- Pillar 3 includes an array of tax-assisted vehicles such as Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and the soon to be launched Pooled Registered Pension Plans (PRPPs).
- Pillar 4 includes assets accumulated over your lifetime such as your primary residence, vacation property (if you are lucky to have one), or stocks held with your brokerage firm in a taxable account.
Through a few examples in the book, Vettese and Moreau highlight most middle-income families saving between 2-7% of their net income over a 30+ year working career, every year, are going to find this is likely “enough money” for retirement. This is because of the retirement income benefits they will receive from Pillars 1 and 2, and the opportunity to sell assets in Pillar 4 later in life.
On understanding our best days are behind us
While The Real Retirement often provides reasons for retirement optimism, there are some headwinds to be mindful of. For one, Vettese and Morneau believe the housing market’s best days are behind us. This is because the high ownership level in Canada means there are fewer buyers available to continue pushing prices higher and higher over the long-term. They say prepare for, eventually, a prolonged period of flat or very slow increasing house prices in Canada. Second, investors need to be mindful that average annual returns on retirement savings are on the way down. With interest rates at historic lows, bonds will do especially poorly for the next few decades. “The yields on bonds may go sideways for a while but can only go up in the longer term, which means bond prices can only go down”. Thirdly, due to major demographic shifts now underway, Canada will not have enough workers in the years ahead to support an aging population. This means various incentives, government policies, and employment practices to encourage early retirement will make little sense. As a result, Canadians will begin working longer and the current, average age of 62 for retirement will no longer be sustainable.
On Neutral Retirement Income Targets (NRITs)
“If 70 per cent were truly your target, you may as well give up”. This message from The Real Retirement suggests not to worry about retirement income rules of thumb such as 70% of your current pre-tax income. This is because payroll deductions that include Canada Pension Plan, the need to save for retirement in retirement, and less tax paid in retirement due to age and pension credits make the 70% pre-retirement target far too high. Vettese and Morneau suggest most Canadians will be more than fine if they can save enough money to cover 50% of their pre-retirement income.
On investment basics and bonds
Some key messages from The Real Retirement include:
- Always focus on “real returns” – after inflation has been accounted for.
- The best times for investing have historically been when fear is rampant.
- Expect negative returns on equities will occur for 2 to 3 calendar years out of every 10.
- Studies indicate government bond yields go through cycles lasting about 60 years: 30 years for the uptrend and 30 years on the other side. If the theory holds true, yields have “virtually no room to move further downward, thus no capital gain opportunities remain”. This means some sort of 70/30 portfolio split (equities/bonds) is a better bet for the foreseeable future.
- “Actuaries estimate that real returns on bonds over the next 25 years will average between 1 and 1.6 per cent depending upon the term of the bond”.
The Real Retirement also includes some straight talk on annuities and the RRIF-puzzle, as well as suggestions in retirement when you can no longer cope on your own.
While not every goal we have for retirement will be realized The Real Retirement suggests a healthy dose of personal responsibility is certainly the place to start. No doubt investors have their fair share of challenges when it comes to planning their future, but life after all is for the living. Take a look at this book if you need some guidance on how to plan for your future but also some reminders about leaving enough time and money to enjoy today.
Want to enter my giveaway and win a copy of this book? Of course you do! Enter the giveaway below and I’ll contact the winner before the holidays. Thanks for reading and sharing this post. Gook luck to all entrants 🙂
My spouse thinks I am crazy because I am always reading financial books while he prefers science fiction. I think the financial books are fascinating and aren’t they a little sci fi too? Thanks for the opportunity to add one more to my collection.
My husband has always insisted on avoiding debt and saving. He has created what little I have as pension savings as I have only worked part time and have no pension. Would be nice to read this book to help our communication around the ‘mysteries’ of investing and retirement planning.
I borrowed this book from the library a few months ago, but would love to own my own copy!
The book looks like an interesting read and I would be honoured to win it – Thanks!
Finance and retirement education, can’t get enough. thanks!
I am 40 now so retiring and the future are things i need to worry about.
I know this sounds paranoid but I am always hesitant to rely on CPP and OAS. My biggest fear is that we use these numbers in our calculations and then by the time we are eligible for them, the government has ceased these programs. Again, I know this sounds crazy, but I prefer to bank on not having them and then one day maybe being pleasantly surprised 🙂
Jess, we are the same way so I don’t think it’s crazy at all. I figure any CPP and OAS income is a bonus for our retirement and could be used to fight inflation or rising healthcare costs. Thanks for the comment.
-“most middle-income families saving between 2-7% of their net income over a 30+ year working career”
The major reason why most cannot retire before 65 is because their saving rate sucks! We are middle-income family and manage to save 40% of our net income since more than 15 years now. If the 2-7% saving is held in CD’s and high MER mutual funds, what is the real return (after inflation and taxes)? Probably negative return…
Mr Morneau, better tell our Canadian fellows they got to stop buying stuff now and educate themselves toward money! Retirement should be easy at 55 years old unless you earned minimum wage all of your working career.
I think the new normal is 10%, net.
Otherwise I think 2-7% is too low.
Saving 40% is outstanding. Very well done.
It will be interesting to see what Mr. Morneau does. He is a very bright guy and I suspect he’ll make some good, but tough, decisions.
This looks like a great book! Still too early for me to retire, but never too early to start planning!
Great blog to read. I’m going to get this book at the library if they have it. Times are tuff.
It sounds like a book that would be well worth a read.
This sounds like a “keeper” type of reference book. Extra interesting because of the new Minister of Finance.
I love the idea that our Finance Minister has hands on experience with real issues facing Canadians. I would love to read his perspective.
I also like the 70/30 suggested split. Just enough to get plenty of exposure, but with some fixed income protection.
My husband and I are focusing on financial independence and it sounds like this book would definitely help us with our planning. Thanks so much for your great blog!
This book has been on my “must read” list since the elections – I’m curious to lean more about Morneau’s thoughts on retirement in Canada. Thanks for the giveaway!
Looks like a great book
Every book which addresses the need to plan for retirement is worth reading. They may not deal with the real issue, but they do make you aware that SAVING for the future is mandatory.
One of the big problems with the younger set is STUDENT LOANS. It does more than creates debt, it places the person in a position where it will take years, and years before they will be in a position even begin saving for the future, if ever!
They also begin to rely on debt, credit cards, buying on time and paying back the minimum amount on loans. Meaning they may never get out of debt.
Looks like a great book – and Canadian too.
While this book is too late for me I disagree with considering ones primary residence as a source of retirement income (unless one is renting out a portion of it). If it works out that way, fine.
You have a great deal to offer from your experience Lloyd. We consider our house an asset, but first and foremost it’s a nice place to live.
I read this book a couple years ago and fully endorse it. It’s well worth the read and provides perhaps one of the more realistic outlooks on retirement (e.g. don’t freak out if you don’t have a million dollars).
Thanks for sharing SST. I think if you want to retire early, you need a good sum of change in your pocket. If you intend to work full-time until age 65, then agreed, “don’t freak out if you don’t have a million dollars”.
The running gag around here is “I don’t care I got no savings for retirement, anyway I’m gonna work until I’m 87 because, you know, times are hard and I really enjoy trading my F-150 to the stealership every 2 years and head south at least twice a year. Life after all is for the living!”
Indeed, you don’t need a big stash if your plan is working to death!
I think I’ll always work at something, but it would be nice to work when I want, how I want 🙂