Having a withdrawal strategy should help your savings withstand inflation: McGugan

Reporting for the Globe and Mail, columnist Ian McGugan says retirees living off a nest egg of money need a strategy to cope with inflation.

“Unlike a truly rare disaster such as a global pandemic, the current inflationary outburst resembles a muted replay of the 1970s – and retirement planners have long used strategies designed to soldier through such episodes,” he writes.

He notes that a key tactic is the “four per cent rule,” developed by financial adviser William Bengen in 1994.

The rule, McGugan explains, “holds that a retiree planning for a 30-year retirement can safely withdraw an inflation-adjusted four per cent of their starting portfolio each year without fear of running out of money.”

Bengen, the article continues, based his formula on a “U.S. retiree with a portfolio split evenly between bonds and stocks,” and his research showed that even during the Great Depression, the Second World War or the “stagflation” period of the 1970s (a long period of very high, stubborn inflation), the four per cent rule would have worked.

Some industry observers, notably Morningstar, advise a lower withdrawal rate of 3.3 per cent, in light of “how bond yields have fallen,” he reports. Others say you could go up to 4.5 per cent.

McGugan notes that economist Karsten Jeske found “no strong relationship between prevailing levels of inflation and future safe withdrawal rates.”

He is more concerned, McGugan reports, about stock valuations as a problem for retirees.

“When stocks are expensive compared with their long-run earnings – as they are now – retirees should be cautious about how much they withdraw from their portfolio because high valuations are usually a sign of lower stock-market returns to come,” the article notes.

When talking about withdrawal rates, we should qualify the discussion by saying that certain retirement savings vehicles, such as registered retirement income funds (RRIFs), set out a minimum amount you must withdraw each year. When you look at the rates, you’ll notice they start out at four per cent when you’re 65, but gradually increase over time. If you make it to 95, the minimum withdrawal rate jumps to 20 per cent.

But if your savings are in a Tax Free Savings Account or any non-registered vehicle, the four per cent is worth consideration. We are all used to getting a steady paycheque, usually every two weeks or twice a month. If you got all your pay in January, you’d have to figure out a way to make it last so you don’t run out with a month or two left in the year. The four per cent rule is a way to make a lump sum of retirement savings last for the long haul.

The way that people used to deal with volatility in stock prices was to invest in bonds and stocks equally, as the article describes. Because interest rates have been low for decades, and bond yields have declined in recent years, modern “balanced” funds tend to add in some bond alternatives that deliver steady, bond-like income, like real estate, infrastructure and mortgages. If stocks pull back, these sources still generate reliable regular income.

A good example is the Saskatchewan Pension Plan’s Balanced Fund. The asset mix of the fund includes not only bonds, but real estate, mortgages, infrastructure and money market exposure, as well as Canadian, U.S. and international equities. This multi-category investment vehicle is a fine place to store your retirement nest egg. Check out SPP today.

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Survey suggests we’ll work longer and have less retirement income

Writing in the Globe and Mail, Ian McGugan takes a look at a new survey from Mercer Canada that he says suggests “the recession created by the novel coronavirus (has) delivered a stinging blow to many retirement systems, including Canada’s.”

According to the article, David Knox, an author of the 2020 Mercer CFA Institute Global Pension Index, says the current economic downturn “will impact future pensions, meaning some people will work longer while others will have to settle for a lower standard of living in retirement.”

Worse, the article reports – women will suffer more than men from this situation.

“Many of the hardest hit will be women. They have suffered disproportionately large job losses in this downturn because many work in sectors, such as restaurants and retailing, that have been hardest hit by lockdown restrictions,” writes McGugan.

As well, Mercer’s Scott Clausen tells the Globe, the traditional “caregiver role” of women means they have tended “to work part-time or take breaks from their career, which reduces their ability to make pension contributions and accumulate time in a pension plan.” The pandemic, Clausen suggests in the article, has made this retirement savings disparity even worse.

Despite these apparent systemic problems, the Globe notes that Canada recently was ranked 9^th out of 39 industrialized nations in meeting the retirement challenge, with a “B” rating.

There’s a second side to the story, the article continues. Not only are people facing challenges in earning money and paying into pension plans, but the pension plans themselves are having a tough time of things, the Globe reports.

Again citing the report, McGugan notes that “a major challenge for retirement planners everywhere is the falling returns from most pension assets. Declining bond yields, reduced company dividends and lower rentals from property investments have shrunk prospective returns.”

In an interesting sort of paradox, the country whose pension system is rated number one in the industrialized world (in the same Mercer survey) is having problems meeting its funding targets. Two large pension plans there may have to cut pension payments next year, reports Dutch News.

“The two biggest Dutch funds, the giant civil service fund APB and the health service fund PFZW had failed to meet official targets in the third quarter of this year. Both funds’ coverage ratios – the assets needed to meet their obligations – had fallen below 90 per cent in the July to September period. If this is the case in the final quarter of the year, they will have to make cuts to pension payouts in 2021. The two big engineering funds are also in the danger zone. Together the four funds cover some eight million pensioners and participants,” the news agency reports.

The key messages here are quite simple – due to the health crisis, many of us are working less, and others not at all. It’s difficult to save for retirement, either in a workplace plan or on your own, if you are earning less overall. At the same time, it’s tough sledding on the investment side for the world’s pension plans. Payouts, as in the Dutch example, could be less.

Members of the Saskatchewan Pension Plan (SPP) have the ability to set their own contribution levels – there’s no set percentage of income that automatically comes off your pay. If you’re making less, or nothing at all, you can reduce or pause contributions without affecting your membership – and when better times return, you can ramp them back up again. Take a minute to check out the SPP today!

“Collision between retirement hopes and financial reality” may be newsmaker of the ‘20s

Writing in the Globe and Mail, columnist Ian McGugan predicts that the “gradual unravelling of the world’s retirement dream” may be the biggest crisis we face in the ‘20s.

While we aren’t seeing violent protests in the streets over pensions, as in Chile and to a lesser degree, France, McGugan suggests that while Canada’s retirement system is not yet broken, there are signs of problems.

The Canadian retirement system, he writes “is now only slightly better than Chile’s in terms of overall design, according to an annual survey of retirement systems in 37 countries, conducted by human-resource consultants Mercer and academics at Monash University in Melbourne.”

The survey, called the 2019 Melbourne Mercer Global Pension Index, says there is currently a $2.5 trillion gap between “existing retirement savings and future retirement needs in Canada.”

The causes of the gap, writes McGugan, include “shrinking access to  corporate pension plans” and “rock-bottom interest rates,” which mean savers must take on riskier investments to grow their retirement pots.

Other factors, he notes, include the growing number of retirees and the fact we’re all living longer. “Many people now live into their nineties, but most still want to retire in their early sixties or even earlier. This means their savings and pensions have to support them for more years, but without any increase in contributions,” he writes.

Let’s unpack these four important points. Workplace pension plans are not as common as they used to be – so many of us must fund our own retirements. Low interest rates make it hard to grow your savings. The number of retirees is growing, which is a strain on government benefits, and we’re generally all expecting to see our 90^th birthday or beyond.

McGugan says there is no magic solution for these problems.

He notes that the fixes out there include “raising official retirement ages by four to six years” so that people work longer, promoting great retirement savings rates, and “accepting that retirement incomes may have to be substantially lower than they are now.”

For instance, people may have to accept that they’ll be living on 60 per cent of what they earned while working, rather than the conventional target of 75 per cent. Making changes to government retirement programs so that they pay less and are thus (in theory) more sustainable will be “political dynamite,” he writes.

McGugan’s analysis seems very accurate. Let’s recall the reaction to two federal government proposals. Years ago, the federal Tories proposed delaying payment of OAS, moving the starting point from 65 to 67. There was a lot of protest over this decision, which ultimately was reversed by a subsequent government. And when that subsequent government moved to increase – gradually, and over decades – the cost of, and payout from, the Canada Pension Plan, many organizations called that an unfair tax hike. So you can lose politically by cutting or by improving benefits.

The bottom line is that even if you do have a workplace pension plan, you need to be thinking about saving for retirement in order to augment your future income. If you don’t have a plan at work then you need to come up with your own. Don’t be overwhelmed – you can start by making little, automatic contributions to your savings, and dial up how much you chip in going forward. But you’ve got to put up that first dollar.

A great retirement savings plan, the Saskatchewan Pension Plan  allows you to put away up to $6,300 each year, within your available RRSP room, in a defined contribution plan.  Your savings will be grown by professional, low-cost investing until the day comes when you need to draw on that money as retirement income. And then, the SPP offers an array of options, including providing you with a lifetime pension. Be sure to check them out.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22

Unfortunately, what goes up must come down and recent volatility illustrates that the stock market is no exception. Your head knows this is the time NOT to check your investments every day or start selling at a loss, but your heart is still going pitter patter at random hours of the day and night.

There is little doubt that unpredictable markets will likely be the norm for the near future. This week we present blogs and mainstream media articles to help you achieve the intestinal fortitude to ride out the storm, particularly if you are retired or close to retirement.

The S&P 500 and Dow Jones Industrial Average both entered correction territory in early February — closing down 10% from the all-time highs that each hit several weeks earlier. The TSX also shed hundreds of points. Fortune explained the drop this way:

“The selloff comes as investors grow worried that the stock market may have run up too much too fast in anticipation of the impact of President Trump’s tax reforms…..The Bank of England likely also fueled some concerns that central banks worldwide would boost interest rates.”

On the Financial Independence Hub, Adrian Mastracci wrote that although you may be rattled by the correction, Diversification keeps your nest egg on the rails. He explained that diversification among asset classes, economic regions, time to maturity, foreign currencies and investment quality increases the odds of you being right more often than wrong. When some selections are suffering, others can step up and help cushion the rest of your portfolio.

For example, the diversified Saskatchewan Pension Plan Balanced Fund is professionally-managed by Greystone Managed Investments and Leith Wheeler Investment Counsel. As of December 31, 2017 the balanced fund portfolio is invested as follows:

• 30.6%: Bonds and mortgages
• 19.3%: International equities
• 19.2%: Canadian equities
• 18.8%: U.S. equities
• 10.2%: Real estate
• 1.9%: Money market

SPP has rated the volatility of this fund as low to medium. Nevertheless, the fund does not have any return guarantees.

The Globe and Mail’s Rob Carrick offers reasons why you should be grateful for the market freakout. “The markets are likely to be ornery for the next while, but there’s no need for radical surgery on properly diversified portfolios of stocks, bonds and cash that you’re holding for the long term,” he says. “Think about strategically adding stocks, not subtracting. After any big market decline, put a little money into quality stocks or exchange-traded funds and mutual funds that hold them.”

On the HuffPost Ann Brenoff addresses How To Handle A Stock Market Drop When You’re Retired. She acknowledges that for retirees or those close to retirement recent market gyrations are gut-wrenching. She comments, “Even those in their 60s likely have many investment years ahead of them. And with that length of time, you will have plenty of opportunity to recover from these types of market drops, she said. The key, though, is staying invested.” Brenoff also points out that if you were invested even just a few months ago, there’s an excellent chance you’re still ahead despite two days of falling prices.

Several months ago Ian McGugan’s column in the Globe and Mail suggests Five things to do if you’re nearing or in retirement and fearing a market pullback. He cites several takeaways from Wade Pfau, an economist at American College in Philadelphia:

1. If you’ve won, stop gambling.
2. Plan for lower returns.
3. Think safety, not wealth.
4. Consider alternatives such as annuities.

Pfau also recommends you ask yourself two questions if you are in doubt whether to stay heavily invested in the stock market: “How would you feel if your wealth doubled? How would you feel if your wealth fell in half? “Most people find the prospect of losing a substantial part of their portfolio far outweighs the possible pleasure of having substantially more,” he said.

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

In June 2016 federal, provincial and territorial finance ministers finally reached an agreement to expand the Canada Pension Plan. However, because the changes will be phased in over an extended period, there has been considerable confusion among many Canadians about how both CPP contributions and benefits will increase, and who the winners and losers will be.

The Globe and Mail reports that an expanded CPP is designed to address the shortfall in middle-income retirement planning that is occurring as a result of disappearing corporate pensions. “Most at risk are workers under the age of 45 with middling incomes – say, families earning about $50,000 to $80,000 a year,” note authors Janet McFarland and Ian McGugan. “Without the defined-benefit pensions that their parents enjoyed, many could hit retirement with little in savings.”

Here is what you need to know about the planned CPP changes.

Effects on CPP retirement pension and post-retirement benefit:
Currently, you and your employer pay 4.95% of your salary into the CPP, up to a maximum income level of $55,300 a year. If you are self-employed you contribute the full 9%.

When you retire at the age of 65, you will be paid a maximum annual pension of $13,370 (2017) under the program if you contributed the maximum amount each year for 40 years (subject to drop out provisions). People earning more than $55,300 do not contribute to CPP above that level, and do not earn any additional pension benefits.

The first major change will increase the annual payout target from about 25% of pre-retirement earnings to 33%. That means if you earn $55,300 a year, you would receive a maximum annual pension of about $18,250 in 2017 dollars by the time you retire — an increase of about $4,880/year (subject to the phase in discussed below).

The second change will increase the maximum amount of income covered by the CPP (YMPE) from $55,300 to about $79,400 (estimated) when the program is fully phased in by 2025, which means higher-income workers will be eligible to earn CPP benefits on a larger portion of their income.

For a worker at the $79,400 income level, CPP benefits will rise to a maximum of about $19,900 a year (estimated in 2016 dollars). Contributions to CPP from workers and companies will increase by one percentage point to 5.95% of wages, phased in slowly between 2019 and 2025 to ease the impact. The federal finance department says the portion of earnings between $54,900 and $79,400 will have a different contribution rate for workers and employers, expected to be set at 4%.

The enhancement also applies to the CPP post-retirement benefit. If you are receiving a CPP retirement pension and you continue to work and make CPP contributions in 2019 or later, your post-retirement benefits will be larger.

Impact on CPP disability benefit/survivor’s benefit
The enhancement will also increase the CPP disability benefit and the CPP survivor’s pension starting in 2019. The increase you receive will depend on how much and for how long you contributed to the enhanced CPP.

Impact on CPP death benefit
There is currently a one-time lump sum taxable death benefit of $2,500 for eligible contributors of $2,500. This amount will not change.

The main beneficiaries of the CPP changes will be young employees, who are less likely to have workplace pension plans than older workers. To earn the full CPP enhancement, a person will have to contribute for 40 years at the new levels once the program is fully phased in by 2025. That means people in their teens today will be the first generation to receive the full increase by 2065.

The recently released Old Age Security report from chief actuary Jean-Claude Ménard which includes the GIS illustrates how higher CPP premiums scheduled to begin in 2019 will ultimately affect the OAS program.

The report reveals that because of the planned CPP changes, by 2060, 6.8% fewer low-income Canadians will qualify for the GIS, representing 243,000 fewer beneficiaries. This will save the federal government $3-billion a year in GIS payments.

In other words, higher CPP benefits mean some low income seniors will no longer qualify for the GIS, which is a component of the Old Age Security program. The GIS benefits are based on income and are apply to single seniors who earn less than $17,688 a year and married/common-law seniors both receiving a full Old Age Security pension who earn less than $23,376.

Also read: 10 things you need to know about enhanced CPP benefits

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

By Sheryl Smolkin

Low earners stand to gain little from an expanded Canada Pension Plan (CPP), according to a new C.D. Howe Institute report. In “The Pressing Question: Does CPP Expansion Help Low Earners?”, authors Kevin Milligan and Tammy Schirle show the large differences in the net payoff from the expanded CPP for lower and higher earners.

Federal and provincial finance ministers agreed in June to expand the Canada Pension Plan. Under the status quo, CPP offers a 25% replacement rate on earnings up to a cap of $54,900. The expanded CPP will add a new layer that raises the replacement rate to 33.3% up to a new earnings cap of about $82,900 when the program is fully phased in by 2025.

To pay for this, both employer and employee contributions will be raised by one percentage point up to the existing earnings cap, and by four percentage points between the old and new earning caps. This expansion will be phased in during the period 2019 to 2025 for contributions, with benefits being phased in over the next 50 years commensurate to contributions paid.

This reform will substantially raise expected CPP benefits for most young workers now entering the workforce. For lower- and middle-earning workers, the higher replacement rate will lead to an eventual benefit increase of about 33% over existing CPP benefits.

For a high-earning worker, the maximum CPP benefits will increase more than 50% over the status quo. These expansions are large enough to make a noticeable difference for the younger generation of workers as the expanded CPP matures over the coming decades.

However, the C.D. Howe study authors note two important shortcomings of the new package hamper its effectiveness, both related to low earners.

First, low earners are already well covered by the existing suite of public pension benefits – many now receive more income when retired than when working. Why expand coverage where it is not needed? As a contributory pension, the CPP risks worsening the balance of income between working and retirement years for low earners.

Second, the income-tested withdrawal of some government-program benefits wipes out much of the impact of extra CPP benefits for many low-earners. Around one-third of Canadian seniors currently receive the income-tested Guaranteed Income Supplement (GIS), so concerns about interactions with income-tested benefits have a broad base.

In order to be eligible for the GIS in 2016, a single, widowed or divorced pensioner receiving a full OAS pension cannot have over $17,376 individual income. Where a couple each receives a full OAS pension they will not be eligible for the GIS if their combined income exceeds $22,944.

To summarize these issues: expanding CPP for low earners risks making some Canadians pay for pension coverage they don’t need. To make matters worse, extra contributions may reduce the living standards of low earners today for modest net rewards in retirement tomorrow.

The CPP agreement-in-principle reached by the finance ministers may address some of these concerns by offering an improvement to the Working Income Tax Benefit alongside the CPP expansion. It is possible that an expanded WITB could effectively counteract increased CPP contributions by some low earners, but no details of the WITB expansion have been provided to date. Nevertheless, low earners would still face the problem of CPP-GIS interactions that undercut the impact of expanded CPP benefits.

In a Globe and Mail article, authors Janet McFarland and Ian McGugan also note that expanded CPP does not do much to help people who do not collect CPP in the first place. That describes many senior women who spent most of their lives as homemakers and so earned little or nothing in CPP benefits. About 28% of single senior women over 65 live in poverty, according to a study this spring for the Broadbent Institute by statistician Richard Shillington of Tristat Resources.

In addition they say the planned CPP changes will also do only a limited amount to help affluent savers because the maximum amount of income covered by the plan will increase to only about $82,800 by 2025. Therefore, those with six-figure incomes will still have to save on their own if they want a retirement income that will replace a considerable portion of their incomes above the expanded limit.