Willie considered an individual born on January 1, 1965 who started contributing to the CPP at age 18 and always earned at or above the Years’ Maximum Pensionable Earnings (YMPE). For the period from 1983 to 2011 he used actual contribution rates. For the future he assumed:

• Future increases in the Consumer Price Index of 3% per year
• Future increases in the YMPE of 4% per year
• A continuation of the present 9.9% employer / employee contribution rate
• A retirement age of 65

His calculations showed that:

• Based on employee contributions only, the effective rate of return is 6.5%, if the individual lives to age 84
• Based on combined employer and employee contributions (which would apply to a self-employed person), the effective rate of return is 4%, if the individual lives to age 83.

For my calculations I used an individual aged 25 in 2011, who is just starting to contribute to the CPP and will retire at age 65. I adopted similar assumptions about the future to those used by Willie and just looked at the situation of a self-employed person. I know that the CPP is a great deal for those of us who are employed!

My calculations showed that:

• If the individual lives to age 90, the return on his combined employer and employee contributions will be 5%
• If the individual lives to age 80, the return on his combined employer and employee contributions will be 3.5%

These results are surprisingly similar to Willie’s, given that:

• He used actual historic data and I used a prospective method
• He used a full 47 year contribution history and I used just 40 years (which should still be sufficient to generate a maximum CPP pension)

One of our friends described this whole process as “fractious and distasteful”. We can understand why he would say this. The CPP is not an investment program; it is a part of Canada’s retirement income system, rated as one of the finest in the world. Our calculations have ignored the disability, survivor and children’s benefits which may also be payable under the Plan. And everyone’s experience under the CPP is different, depending on their contribution history and their personal circumstances.

But next time somebody tells you that the CPP is a terrible program, and that you would be much better off investing the money yourself, you can tell them they’re wrong!

Patrick Longhurst

While I have been on vacation in Japan and Australia I have often thought about this advice because:

• My wife and I flew coach all the way and the leg from Japan to Australia, in particular, was very uncomfortable – why did I not take my own advice?
• We stayed with our son and his wife in Sydney and he frequently questioned our judgement in, for example, using local transportation when we could have taken a taxi. I think he sees us as two old fogies who should not be allowed out unsupervised!

So I asked myself, what are the implications of spending more on yourself and why should it be so hard?

First, I thought of good friends of ours who are in their 80s and could certainly afford to be more generous with themselves. We often shake our heads when:

• They traumatise themselves by driving on the expressway to come and see us, but refuse to either let us pick them up or take a taxi
• They won’t go on cruises because they would not be able to take full advantage of the features provided
• They struggle to do work in their home and garden rather than hire someone to do it for them.

We see these as examples of poor decision-making, so, maybe from our son’s perspective we make bad decisions also. The fact is, it’s hard to change the spending habits of a lifetime.

Of course, there are many unselfish ways to spend money by helping out friends and family or by making charitable contributions. However, it is not unreasonable to spend some money on yourself. With this in mind, I am please to offer below Patrick’s thoughts on how to enjoy spending more:

• Finding a bargain is always enjoyable, so never deny yourself the pleasure of buying something you want when it is on sale, or taking advantage of a special offer. Spending more does not imply being extravagant for the sake of it.
• If you are seriously happy with flying coach, taking public transit or staying at economy accommodation, then do it. My wife and I love to camp in the Provincial Parks. Staying at a lodge does not give us nearly the same pleasure.
• If you are routinely doing something you dislike or you are no longer physically equipped for and that you could pay someone else to do, then consider it.
• If you are denying yourself pleasure because you are concerned about some aspect of the travel involved, then look for an alternative, even if it is more expensive.
• If you find yourself in a situation where you are worried about your personal safety or wellbeing, then think outside the box to solve it. We were seriously concerned about getting out of Japan after the earthquake and tsunami had struck. We were quite prepared to take the bullet train from Tokyo to Kyoto and to book a new plane flight, rather than be stuck in Tokyo with its frequent aftershocks.

Above all, have fun!

Patrick Longhurst

The economy and the labour markets have gone through enormous changes in the last fifty years. The historical pattern of employment has changed. A long career with a single employer has been replaced with short periods with many different employers. Careers are interrupted frequently and often involuntarily.

In response, the federal, provincial and territorial ministers of finance, as joint stewards of the Canada Pension Plan, announced changes to the plan May of 2009 which start taking effect this year. For an overview of the impact of these changes, click here to download the white paper “Canada Pension Plan in Transition” or contact us for a more in-depth review of your situation.

William Jack

In common with many people our age, we  are at the start of a transition from accumulating retirement savings to converting those assets into an income stream that supports our lifestyle and our vision of retirement. We have spent a considerable amount of time addressing these challenges which we will discuss in later articles.

As Mary and I begin this “assets to income” conversion, we have been very careful to identify and plan for the risks to our retirement income. The following list developed by Peter Drake, Vice President, Retirement and Economic Research, Fidelity Investments Canada provides a good overview of things you should consider.

Longevity Risk

This is the risk that you and your partner will outlive your money. That is, you exhaust your savings before the end of your lives.

Inflation Risk

This is the risk that inflation erodes the value of your income stream to the point that it affects your lifestyle.

Asset Allocation Risk

Asset allocation refers to the mix of stocks, bonds and cash equivalents in your investment portfolio. The events of 2008 and 2009 are an extreme example of the volatility in the stock markets. . A diversified portfolio, that includes stocks, is needed for growth to help protect against inflation.

Withdrawal Rate Risk

Withdrawing annual amounts in excess of 4 to 5%, increase the risk of depleting your funds too soon. It is difficult to rapidly alter your lifestyle to reduce withdrawals when your funds shrink due to market volatility.

Health Risk

Large medical bills caused by unexpected illness could drain your funds. The cost of home care over prolonged periods of time could have a similar result.

In future articles, we will discuss the five risks  in more detail and suggest a process to help you determine the right mix of products to implement your retirement financial strategy.

William Jack

The article presents a very strong case for how useful this binder was to Lillian. After reading the article, my wife decided to put together our “Just in Case File”. She chose to put together a set of tables in a Word document which you can see here.

We learned a great deal as we went through the process of assembling the myriad of bits and pieces that go into the document. Here are some of the things that we found.

• It is very easy to procrastinate doing this. I suspect that this is because it forces you to contemplate a scenario that is almost too grim to contemplate.
• Depending on how well organized you are, it takes a long time to get everything together. It is also going to take some discipline to keep it up to date.
• Having completed our file, it is difficult to imagine how long it would take our executor to sift through all of our filing cabinets, to assemble all of this material. There is no question in our minds that it would seriously prolong the time and expense required to settle our estate.
• These matters are legislated at the provincial level. The rules change province by province.

There were a number of practical issues, that we stumbled across, that we want to share with you.

You need to decide what your file looks like. Is it a binder, like Lillian’s with the originals filed in it? Is it a Word document filed on your home computer or printed out and filed in your office. Is it an HTML document on some provider’s web site?

There is a lot of very sensitive personal information in this document. How do you secure access to it? You can password protect a Word document. You can keep it in your safe at home or you can put it in your safety deposit box in your bank.

Now there is the problem of how your executor knows where to find it and how they get access. Do you write down the location and the password for the document? Do you really want to write down the combination to your home safe or the location of the key to your safety deposit box?

To start the process off, the executor needs the original copy of the will. We discovered that you cannot use a copy of the will to persuade the bank to let you into the safety deposit box in order to get the original.

It is a lot of work, there is no doubt about it. I feel about this document, the way I feel about wills and powers of attorney. A little time and attention on your part, can save your family an enormous amount of time and effort at a time when things are not going particularly well for them.

William Jack

Since the issue motivating us to contemplate this move, is the number of steps from street level to our front door (25) and from our front door to the master bedroom (15), an apartment seemed more feasible than a multistory townhouse. The tradeoff appeared to be more space in the townhouse versus no steps in an apartment. There have been two recent developments that have altered our thinking.

Several weeks ago, we invited Mary’s family over for brunch. The eight adults ranged  in age from 89 to 32. They all arrived at the same time and they all climbed up those 25 steps. We greeted them at the door and took their coats. We then watched as some of them spent the next five minutes catching their breaths. It suddenly occurred to me that my wife and I did not have the same issue with the steps because we climbed them two or three times a day. We had not appreciated that we were getting aerobic exercise every time we climbed the steps. This is a real upside that has started to change our thinking. Nevertheless, the fact still remains that sometime in the future, steps will become a real obstacle.

There are several townhouse developments in our neighbourhood that we have been watching with some interest. We like our neighbourhood very much and have been focussing on apartments and townhouses nearby. I was pleasantly surprised to find out that one of the options available, in addition to the usual kitchen and floor finishes, was an elevator. This option costs an additional $35,000 and obviously consumes some floor space. The upside, of course, is that it takes all the sting out of living in a three story townhouse. The sales people mentioned that out of the six townhouses on sale, four of the purchasers had taken this option.

Our research continues as we satisfy ourselves that we understand all of the options available to us. We are now looking at the four ways of owning property. The choices are to rent, purchase a condominium, purchase a share in a cooperative or to purchase a property with a life lease. I was surprised when I Googled “life lease Toronto”.

I will keep you posted.

William Jack

Here is the list that we have assembled to date. Some considerations apply to either a townhouse or an apartment, some just to a townhouse and some just to an apartment.

Townhouse or Apartment

• The unit must face south or west
• It must have a lot of windows because we want a lot of sunlight
• For air flow, it must have windows on more than one side
• It must have a comfortable, private bedroom for visitors
• It must have room for offices for both of us, or, as this is extremely unlikely, easy access to inexpensive rental property for offices
• Good access to public transit
• Good access to a fitness facility, preferably with a swimming pool
• Walking distance to shopping, restaurants and pubs
• A fireplace, preferably wood burning but gas would do
• Dishwasher, clothes washer and dryer
• Separate kitchen, dining and living room

Townhouse

• Private terrace, the larger the better
• No more than three floors
• Elevator very desirable

Apartment

• Must be on the top floor or in a quiet building
• Must have a balcony, the more private and the larger the better
• Not a high rise building, 6 – 7 stories max, preferably 3 – 4 stories
• The view must be unobstructed, preferably unobstructable

Having written this, a couple of points come to mind.

1. It sounds an awful lot like our current house.
2. It sounds awfully expensive.

William Jack

Fast forward to 2004, when I was helping a client decide which pension option was more attractive for him, out of a choice between a lump sum settlement and a lifetime pension. To illustrate the potential outcomes of the two choices available to him I had built a financial model which could project out both scenarios. At the time, it seemed reasonable to me that the scenario which gave the greater net worth at the end of his life was the “better” option for him. At the time I was creating this model, I must have had some spare time, because I started to play with the model and to analyze the impact of changing certain of the underlying facts. I was surprised to find that by varying, for example, the amounts of registered and non-registered investments he had, independent of the pension decision, I could actually change the most favourable outcome. This lead me to what I felt was a great discovery – pension decisions in context.

Since then I have continued to refine my approach to helping clients who have pension decisions to make, but always with the belief that a clear understanding was a fundamental requirement and that context was critical. There is no universal right answer to a choice between two pension options. Over time this has developed into the three step process that I use today:

1. Make sure you fully understand the choices available to you and the implications of those choices
2. Compare yourself to the “average” plan member and see how this might influence your decision
3. Consider the overall context in which the decision is being made.

I wrote an article for the November edition of the CA Magazine which expands on the notion of the three steps which you can read in full here.

Patrick Longhurst

Saving more before retirement naturally implies spending less. An analysis of current expenses often reveals potential areas of savings; sometimes on items that have been automatic account withdrawals for a number of years. The other interesting issue to consider is where to save. These days the choices include Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and traditional non-registered savings. Each choice has its own pros and cons.

Taking less income in retirement also involves a reduction in expenses. However, that reduction does not need to be immediate. In projecting their future expenses, many individuals assume that their level of expenses immediately after retirement is expected to continue for the rest of their lives. In practice, for most of us, the amount we spend on items like vacations and automobiles is likely to decrease as we age.

Earning a higher rate of investment return is certainly not a magic answer to all our problems. Increased returns typically imply increased volatility, and we may not be ready to assume additional risk at this stage of our lives. However, it is always a good idea to review your investment strategy on a regular basis and to see if there are ways to:

• Earn a higher rate of return without increasing the overall level of risk in your portfolio
• Earn the same rate of return but with reduced investment expenses
• Find a more tax effective way to invest which increases your after-tax return.

Finally, working longer is not necessarily the worst thing imaginable! Nobody said you had to stay in the same job if you don’t like it. Today, an increasing number of people are discovering the pleasure of part-time work after “retirement”, whether employed or self-employed. It is certainly worth considering if it ensures the viability of your overall financial plan.

In summary, there are options out there for individuals of all ages. Don’t ignore the planning process because “it is too late to do anything about it”.

More information on Av and his services can be found at www.iretire.org.

Patrick Longhurst

We now find ourselves helping different groups of people facing major but predictable transitions in their lives. We help them sort out both the financial and the lifestyle issues to enable them to make the most appropriate decisions in the circumstances.

The first group of people we are encountering is in the 50 to 65 age range. Their focus is shifting from educating their children and paying off the mortgage to saving for retirement. The lifestyle challenges typically involve defining their vision of retirement, while their financial challenges turn on whether they will have sufficient assets to fund that vision. The question is “Do our plans hang together?”

The second group we deal with is in the 60 to 70 age range. These people are actually implementing their retirement. Their financial challenges involve decisions about payout vehicles. When do I convert my RRSP’s? Do I use systematic withdrawal programmes, guaranteed minimum withdrawal products or annuities purchased from an insurance company? Do I need to keep working to support my lifestyle?  How long will I need to keep working?

The third group is people planning to downsize their home. They are in the 70 to 85 age range. The cost and effort required to stay in their home is approaching a threshold. The life style challenge is to determine where they are going to live, coupled with the financial issue of affordability. Will we need to move to a smaller town to save money? What are our alternatives between condos, apartments and life leases? What can we afford?

The fourth group is in the 80 to 90 age range. In our practice, these people are the parents of our current clients. The need for assistance with the activities of daily living is approaching the point where living on their own becomes very difficult or very expensive or both. The driving issue is their caregiver. This is the person who does their shopping and banking, the person who becomes their advocate with the health care system. They will need to live close to this person. Their choice of accommodation will be determined by the state of their health. The financial question is “What can I (my family) afford?

We hope this simple roadmap from our practice will help others to make timely decisions about their lifestyle and financial choices in retirement.

William Jack