After getting some feedback about Lesson 41, I realised that my last topic on risk diversification was pretty technical and a bit difficult to read through. Perhaps I got very motivated from some prior MBA risk management topic and went off the rails spewing my brain puke everywhere.
For this next post, I figured I’d “tone it down” and speak to something that is more tangible and something that everyone can or eventually will relate to. That something is retirement.
Individuals define retirement in different ways. For some, retirement means not having to work anymore, and for others it means having a quality life with minimal stress. While both are ideal, financial independence is also a key component to retirement, and will usually mean no more work, and a life with minimal stress.
The saving for retirement rhetoric seems nonstop, either through one’s financial planner, your bank, through your employer, through social media, or through your friends. It’s something that everyone is told to do, yet many become complacent to actually planning for financial freedom efficiently come retirement. The notion of being comfortable when you reach your deemed retirement age is becoming ever more important as time goes on. Modern medicine and technology are allowing humans to live longer, and therefore the necessity to stretch out one’s savings over a longer period of time is growing.
StatsCanada and Statista show that the average human life expectancy has been trending upwards since 1920, with the average life expectancy in 2018 to be 80 for males, and 84 for females in Canada.
Figure 1: Historical Life Expectancy in Canada
Longer lives mean more dependency on social security, personal health benefits and services, pension funds, and other sources of income.
There are two primary retirement income systems. Old Age Security (OAS) is a non-contributory federal pension program that is funded by federal tax revenues. The second system is the Canadian Pension Plan (CPP) that is a contributory system based on personal income that is paid into over the course of one’s employment timeline. In Canada, the retirement age is 65.This is also the eligibility age to receive monthly OAS and CPP (although CPP can be withdrawn at reduced amounts starting at age 60, or deferred until age 70 for increased amounts).
The dependence on federal retirement income systems, namely CPP, has been under scrutiny for a long time in Canada. There has been criticism around the government’s ability to pay out in full the pension funds come retirement for Canadian citizens who have paid into the public fund over their working lifetime (Globe and Mail). Many believe this is increasingly concerning, especially for later generations as the baby boomer generation enters the retirement period over the next few years and will be withdrawing from this public fund. CPP contribution by the working force has continued to down trend, meaning less funds are being put into CPP. However, there have been changes over the past few years by the Canadian federal government that mandate certain contribution rates from employers/employees in certain public and private sectors, with additional funding support from the federal government through other incomes sources. Whether this ultimately will ensure long term affordability of the CPP for people retiring 30 years from now… who knows. But having a lesser reliance on receiving CPP in the future and focusing on building up your own nest egg instead is ideal and advantageous in achieving financial freedom come retirement.
Lowering one’s risk exposure as retirement nears is also a smart thing to do to reduce the impact or likelihood of losing a good chunk of your retirement savings due to an economic downtrend or market upset within years of when you plan to retire. Structuring your investment portfolio away from risky assets like stocks and towards less risky and steady cash flow instruments like bonds gradually over time will position yourself into a “lower risk state” come retirement. Dealing with substantial losses and market volatility when you are young and when you can invest more over additional working years is fine. However, having to experience such losses around the time when you are getting ready to pull your money out for retirement to live off of is not ideal. There are so many sources that promote the ideal “stock vs. bond” portfolio allocation, but they all have the same theme in common in which a gradual shift towards bonds and away from stocks as retirement age nears is the best approach.
I’ve always been of the mindset to look after yourself when it comes to planning for your future financial freedom and not to depend on funding and benefits from entities outside of your control. Without trying to sound pessimistic, it’s best to develop a financial retirement plan with a wealth planner or your financial advisor, and to think of any added sources of income during retirement, like from CPP or OAS, as an added unexpected bonus.
You are the master of your own destiny! Take hold of the reins of your own retirement savings fund!… Oh okay tone it down bud….