Gambling With Your Future

Curious about retirement income? Curious about whether you are financially prepared for that time in life?

The Canadian government completed a comprehensive review of retirement income in 2011. Not surprisingly, most seniors draw income from OAS and CPP. About half of seniors draw income from investments, over 60 percent draw income from pensions and RRSPs and about 20 percent draw income from employment.

The median income for seniors in Canada:

• OAS: 6,400 for males and 6,400 for females
• CPP: 7,800 for males and 6,200 for females
• Investments: 1,200 for males and 1,300 for females
• Pensions and RRSPs: 16,300 for males and 8,500 for females
• Employment: 2,200 for males and 3,300 for females

A senior couple would be at roughly $60,000 in income at retirement. Median after-tax income in senior families was $52,300 in 2012 so that number is close enough.

Median family income in Canada was $76,000 in 2013, just as many households earned less than $76,000 as earned more. The richest ten percent made more than $80,400 and the top one percent, all 272,600 of them, made more than $191,000. You can read more about the Canadian Income Survey here.

That gives a pretty good range of estimates for retirement income. Middle income senior households would be in the $40,000 to $70,000 range, upper income seniors in the $70,000 to $100,000 range. Above that would be a very small group of seniors.

For the median, a senior couple would expect to have the government provide $26,800 through OAS and CPP. The balance, $33,200, would have to be funded from pensions and investments. A rough estimate would suggest that investable assets of about $800,000 would be required to produce $33,200 reliably over the retirement years. And, of course, adjusting for inflation would make all of these assumptions higher depending on the planning horizon.

Assuming a 15 percent savings rate for the median family income of $76,000, investing $11,400 at age 35 and making annual additions of $11,400 for 30 years would produce about $800,000 in retirement savings assuming a 5 percent rate of return — and that number would likely be short as the income needs at retirement would be higher due to the impact of inflation.

Hence why a pension can be so very important for most families.

BlackRock recently issued their Global Investor Pulse for Canada. You can download the report here.

Most Canadians expect to require an annual income of $47,000 at retirement — well below the median senior household income of 2011. Four out of ten Canadians have no retirement savings whatsoever. Canadians above 55 years of age have saved a median of $125,000 for retirement enough to produce roughly $5,000 – 6,000 of income and well below what they will need in their retirement years.

And, more telling, half of Canadians believe that investing is on par with gambling and they hold their savings in cash in low interest bearing accounts.

The BlackRock report highlights 5 steps that Canadians can take to raise their financial IQ:

1. Take Ownership

When it comes to financial planning, it”™s important to remember that it starts with you. Whether it”™s doing it yourself or seeking advice from an expert, you have an important””and active””role in making these decisions, and the most to win or lose based on how you spend, save and invest your money.

2. Get Informed

Before you take action, make sure you know the options available. For example, when it comes to retirement this could include: workplace plans, government options, or individual retirement accounts. Don”™t be part of the 50% of Canadians who don”™t know how much money they will need to last them through retirement, or the 52% of those with a Defined Contribution or RRSP plan who do not understand what their maximum contribution is to their plan. Seek ways to become better informed.

3. Make a Plan and Stick to It

Sometimes the now gets in the way of planning for the future. Setting goals is the first important step to ensure that you put yourself on track to achieving your objectives, including a comfortable retirement. Most Canadians (64%) agree that they take financial planning seriously. Make sure that you are part of the group that believes in financial planning and also has a plan to make it happen.

4. Seek Advice

Major life events, like preparing for retirement, starting a business or dealing with an inheritance, can have long-term implications for people”™s financial wellbeing. Seeking advice can help you get on the right path. Advice can come in many forms and is made easier by technology. Whether through work, a friend, family, online or a nancial advisor, don”™t be afraid to seek advice.

5. Start Early

One of the most important steps you can take to have a successful retirement is to start early. We know from this study that most Canadians who invest begin doing so by the time they reach age 35 (68%). The younger you are, the more time you will have to grow your investments. Consider the most often-mentioned piece of advice that Canadians (56%) would give their “younger self” about saving and investing: start saving for retirement from a younger age.