Financially independent seniors require less government help: Frazer Stark

Writing in the Financial Post, Frazer Stark notes that the “looming crisis” of baby boomer retirements — with those boomers living longer lives than their forbears — can be solved with a little more focus on self-reliance.

“Retirees,” he writes, “face uncertainty on multiple fronts: market returns, cost inflation and their own physical health. Yet it’s the unknown length of an individual’s ultimate lifespan that creates a labyrinthine financial planning challenge.”

“Consider that a 65-year-old woman entering retirement can expect to live on average to age 87,” he explains. “This average hides variability: she still has a 10-per-cent chance of living past 100, a one-per-cent chance of living past 105 and a tiny chance of reaching 110 or even beyond that (the oldest Canadian on record passed away at 117 years and 230 days). This variability makes determining how much to safely spend from her nest egg rather tricky,” he writes.

This danger of outliving one’s savings, he explains, can be handled several ways. You can “play it safe” and avoid drawing down your savings, he writes. But that carries the cost of “not fully enjoying these special retirement years while we can.”

You could also simply ignore the problem of living into your 90s and beyond by spending “freely as you set into retirement.” This can backfire, Stark adds, and your future you may suffer as a result of early heavy spending.

Defined benefit (DB) pension plans, Stark continues, offer a form of insurance against longevity, as such pensions are paid for life. Yet, he says, we “continue to steadily transition away from the DB pension structures that offered comfortable, confident retirements to previous generations.” Less than nine per cent of private-sector workers have DB plans today, compared to 50 per cent in the late 1970s, he notes.

Because such plans are so scarce in the private sector (they are more common in the public sector), Stark writes that “some… are giving up, viewing retirement as an unattainable goal.” Recent research has found that many have “curtailed saving,” rather than cutting back on today’s expenses to save for tomorrow, he continues.

As an example, he writes that the average price of a new car in 2022 hit more than $61,000, while in the same year, “59 per cent of Canadians said they were saving nothing for retirement, or little at all.”

Only a small percentage of Canadians insure themselves against running out of money in retirement via the use of lifetime annuities, he writes.

There has been progress in rolling out low-fee retirement savings programs (Stark mentions Wealthsimple), but “a similar evolution is now essential for the decumulation phase,” when saved retirement dollars are turned into income.

“Last year, the Organization for Economic Co-operation and Development (OECD) updated its pension-program guidelines, recommending that member countries provide their retired populations access to income-for-life options, including `by non-guaranteed arrangements where longevity risk is pooled among participants,’” Stark writes.

While work is being started by government and the financial sector on programs that address longevity risk for retirees, the path to this future “remains largely untrodden, and much work remains,” he continues.

Stark sees a solution in boosting “baseline education” about finances, and developing for Canadians “a set of tools to solve the decumulation problem for themselves.” This won’t be easy, will require a lot of innovation, but will be worth it, he predicts.

“Every Canadian who can comfortably navigate their own retirement finances is one less person requiring expensive subsidized care from the public purse, which must come from either increased taxes, additional borrowing or reduced spending elsewhere. The fourth option would be to simply not provide aid, creating tremendous suffering among our vulnerable elderly population and a stain on our national conscience,” he concludes.

This is a very well-written and detailed look at an insidious problem that tends to bite you in the backside when you are too old to deal with it — running out, or running low, on retirement income.

There is a way out of this for members of the Saskatchewan Pension Plan. SPP has you covered on the savings side — your contributed dollars are invested in a low-cost, expertly managed pooled fund. But SPP also has you covered at the drawdown stage. You can choose from a variety of SPP annuity options when you retire. All of them will provide you with an income supply that never runs out — a payment nestled in your bank account at the beginning of every month.

Check out SPP today!

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