“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 🙂