The Ballooning Cost of Growing Old

Senior Couple Enjoying Beach Holiday Running Down Dune
The reality about retirement is that this bit can be fleetingly short compared with the scope of being elderly. 

Getting old is something that comes to us all and is rightly considered a blessing of our modern world. Free from most wars, crime and disease the average age of Canadians continues to rise, with current life expectancy just over 82 years.

But being old is no fun. From your late 70s onward quality of life begins to decline in a multitude of ways. From a media perspective we tend to focus on outliers, like the oldest marathon runner, or the oldest male model, men and women who seem to exemplify youth well past their physical. In truth though the aging process is simply a battle that we have gotten good at slowing down.

20696006In his excellent book Being Mortal, author and practicing surgeon Atul Gawande goes through the effects of aging, the limits of science to combat it and how we could be using medicine better to improve quality of life for the elderly. It’s a great and sometimes upsetting read that I recommend for everyone.

One of the great challenges that looms on the horizon is the cost of an aging population. The dependency ratio for the elderly (the metric of people over 65 against those between the working ages of 20-64) is rising, putting higher living costs on a smaller working base. In Canada the dependency ratio is expected to climb to 25% by 2050, and is currently at 23.77% as of 2015. That may not seem like much, but in 1980 (the year I was born) the ratio was 13.84%.

ch1_graph3.0-eng

Since old age is also the point where you consume the most in terms of health care costs we should be aware that Canada’s population isn’t just aging, but that our retiring seniors are poised to become the biggest and most expensive demographic; financially dependent on a shrinking workforce and more economically fragile than they realize. That’s a problem that nations like Japan have been struggling with, where old age benefits are extensive, but the workforce has dwindled.

In other articles we’ve touched on the various aspects of the rising costs of old age. I’ve written about: the importance of wills, the impact of an aging population on our public health care, how demographics shift both investing patterns and warp our economic senses, why seniors may be getting too much of a break economically, how poor land management has made cities too expensive and that’s hurting retirement, and how certain trends are making retirement more expensive. Often these are written as issues in a distant (or not too distant) future. But increasingly they won’t be.

This past week eight long term care facilities have said they will be leaving Toronto. As part of a bigger project, long term care spaces are being rebuilt to meet new guidelines. A new facility is larger, more spacious and designed to maximize medical care. However land costs within Toronto are proving to be too high to be considered for the updated facilities. Why is that? The government pays $150 a day per bed in a facility like the ones leaving. From that subsidy costs for maintenance, nurses, janitors, medicine and food as well as the profit of the business must all be extracted. Margins are thin and building costs in the city are huge. Six more facilities are also considering leaving the GTA for cheaper land.

 

Toronto's City Hall, Nathan Phillips Square. (Shutterstock)
Toronto is a wonderful city, but we’ve done a bad job of making sure that we can still afford to live here. 

 

Eric Hoskins, health minister for the province, is arguing that the subsidy the government provides is enough, but he is already embroiled in other fights with the medical community. In 2015 the ministry cut doctors fees and began clawing back previously earned money as well. Currently lots of people in Ontario struggle to see their family doctor, and there are 28,000 elderly waiting to get access to long term care facilities, and only 79,000 beds. Coincidentally this is also the year that the Ontario Liberals balanced the books. Something about that should give us pause.

This is the reality of getting old in 2017. Costs are rising and are expected to continue growing. Some of this you can’t avoid, and many of us will end up in private retirement homes, assisted living situations, dependent on the government or even family. But there are steps that can be taken to protect assets and insulate against protracted medical or legal disputes.

Here’s a list of eight things that can help you with retirement and your estate:

  1. Keep an updated will and a named executor young enough to handle your affairs. I know it goes without saying, but its extremely important and many of us don’t do it.
  2. Ensure that you’ve got a Power of Attorney (POA) established and that it is current.
  3. Make sure you have a living will and discuss with your family your expectations about how you want your life to end.
  4. Look into your funeral arrangements while you can. It seems macabre, but funerals can be wildly expensive and burdensome to thrust onto grieving family.
  5. Create a space where all important documents can be found by your next of kin and with a detailed contact sheet so people can help settle your estate.
  6. Look into assisted living options early and consider what you might be able to afford. Have your financial plan reflect some of these income needs.
  7. Consider passing along family heirlooms early. Is there a broach, or a clock that you would like to see in someone’s hands? These conversations are easier to handle when you are well than when you aren’t, and downsizing frequently involves saying goodbye to long loved possessions.
  8. Big assets like houses and cottages should be discussed with family, especially if there is a large family and the assets might need to be shared. A lot of family strife comes from poor communication between generations and among siblings.

There will be much more to say about getting old, about protecting quality of life and managing the rising costs of living on fixed incomes. We gain little from sticking our heads in the sand and hoping that we will be healthy and strong to the day we die. In reality our retirement plans should better reflect not our most hopeful ideas of retirement but instead our greatest concerns and seek ways to preserve our quality of life.

Is It Time To End The “Senior” Citizen?

Margaret Wente is both enjoying the perks of her
Margaret Wente is both enjoying the perks of her “seniority” and worries that we may be undermining the future.

Over the weekend one of my clients posted an article from Margaret Wente about the many privileges bestowed upon seniors in Canada. Listing an almost unbelievable number of perks for “elderly” Canadians, which ranged from discounts at drug stores and movie theaters to government pensions and new federal tweaks to retirement programs, in every way seniors in Canada have it pretty good.

So good in fact that Margaret Wente has begun to despair. Not for herself, but for the future. The younger generation is definitely having a tougher time than their parents. And while none of this predicts that the Millennial’s will be poor, it does go to the heart of the uneven balance about finances that exists between generations.

Who has the most money and assets in Canada?
Who has the most money and assets in Canada?

One of the big changes in the federal budget was a reduction in the mandatory RRIF withdrawals that will effect everyone over 71. Putting the final nail in the coffin of the often heard and mostly pointless “RRSP/RRIF tax trap” the Conservative government has slowed the income coming to retirees from their long term retirement savings. This is being lamented as little more than “tax avoidance” for one generation by Carleton economics professor Francis Woolley, who has her own piece in the Globe & Mail about RRIF and Taxes. It’s a good read but if I may, her essential point is: “people don’t like to pay taxes.”

What’s happening is that we live in unprecedented times. Unprecedented in the life span of those living, the material wealth we have available to us, and the inverted demographics that comprise many countries around the globe. Everywhere people are richer, living longer and getting older. Many of our concerns about the economy, the cost of living, or the security of programs like CPP, or Social Security in the United States, are born directly from our success at creating a higher standard of living. Higher wages, better medicine and  a declining birth rate make us materially richer, until they don’t.

Courtesy of Gapminder
Courtesy of Gapminder

What you are looking at in the above chart is the changing nature of both Canada’s and the worlds age. From 1950 on Canada briefly saw a boom in the birth rate that has since reversed itself. The number of Canadians over 60 (the y-axis) is now better than 20% of the total Canadian population, while the number of children (on the x-axis) has been steady at about 5%.

“So, we’ll give them a little money to tide them over until they die, which will only be in a couple of years anyway, no long term financial entitlements for us!”

All the goodies that benefit the senior class of Canadians are getting more costly both because Canadians are living longer, but also because the tax-base needed to support many of those services is shrinking. But are seniors “too rich” as Margaret Wente thinks? Probably not. While Canadian poverty rates for the elderly are some of the lowest in the world, people who retire at 65 need to make all their savings last them until they are ninety, or older. You try and figure out what you are going to spend for the next 20-30 years. When Otto Von Bismark introduced the worlds first old age pension, it was for people who were 70 years old and their life expectancy was for maybe two more years. Today people retire and they live another lifetime. As we’ve previously said, when you’ve retired you’ve earned your last dollar. That can be a pretty scary thought.

The solution? There isn’t one. As I said these are unprecedented times. We still treat retirement like those who hit 65 are “old”. When my grandfather was 12 he had finished school, worked in

This book was written in 1997. 1997! It's taken 20 years for it to be relevant.
This book was written in 1997. 1997! It’s taken 20 years for it to be relevant.

a factory and eventually fought in the Second World War. By the time he was 65, suffering from lung deterioration after a life time of smoking, his face bore every year like the rings of a felled tree. My father on the other hand just had his 70th birthday and looks barely 60. That isn’t good genetics, that’s the product of good living. This trend is global, affecting everyone from China to Canada, and it will be with us for a long time. For many years people have been sounding the alarm about the demographic storm that is approaching, but such storms are slow moving. This is the beginning of a much larger set of conversations that will begin to address how we perceive retirement, savings, economic growth and government programs like the CPP. How we ultimately address and resolve the burgeoning conflicts about age and wealth will put many of us, and our retirement plans, to the test.

You Won’t Believe How RRSPs Can Ruin Your Retirement!

h64ocNo seriously, you won’t believe it. That’s because RRSPs really can’t ruin your retirement, and yet every year someone, somewhere writes an article about the RRSP Tax Trap! This year’s contribution is from the Globe and Mail, which was also the source of last year’s main entry (also by the same author). The argument in these articles is that your RRSPs can become a taxation nightmare, forcing up your annual income and making you pay a higher marginal tax rate in retirement than you did in your working years! Cue panic.

Wondering why you don’t hear this complaint more? Why you don’t see lots of special reports on the nightly news of some sad-sack sitting at his kitchen table opening letters and then explaining to the camera how he “never foresaw the tax nightmare he’s in” happening? That’s because this particular issue is often overlooked as being one of having too much money, and is not widely regarded as a significant problem by most people (in fact the opposite for most Canadians is true). And while it’s true that being wealthy can create more complexity in investment strategies the “mo’ money, mo’ problems” aspect here has yet to stir a vast number of people to forgo their wealth and move to a commune.

The crux of these regular articles however (the reason why your average middle class Canadian should worry) is because RRSPs don’t save you taxes, but DEFER them. This emphasis on deferral, that your taxes will come back to haunt you is the kind of half truth that the media cheaply peddles without much thought for whether it does any real harm to the investor reading the article. It’s also bad math, because in addition to the taxes you deferred by contributing to your RRSP, there is also all the taxes you didn’t pay over the lifetime of the investment.

Let’s create a simple scenario to better illustrate what I mean. Assume the following things:

  1. You are 50.
  2. You currently earn, and will never earn more than $125,000 from now until you are 71.
  3. That you contribute every year $22,000 to your RRSP
  4. That your investments will return an average of 6% per year.
  5. That you start your RRSPs at age 50 with $100,000
  6. You invest $5500 of your tax refund into a TFSA with a 6% ROI

Let’s also create a second scenario, identical to the first, but instead of saving in an RRSP you do it in an unregistered savings account, splitting the $22,000 contribution between that and a TFSA, with a taxable rebalance triggered every 5 years. In all other respects the scenarios would be identical. What would happen?

Well thanks to excel it would look something like this:

20 Year Savings Plan

That gap in returns is the compounding difference of avoiding ongoing taxes from rebalancing and investing a portion of your tax refund into your TFSA. In essence you made each dollar travel farther over that twenty years by utilizing your RRSP more than you did without out, to the tune of nearly 25% additional savings.

There are a lot of ways to play with this, with numerous avenues to improve or refine this scenario, but no matter how you slice up these hypothetical scenarios there will never be a version where having less money is inherently better than having more. Having more is the whole reason you’ve been saving in RRSPs in the first place.

h64pl

That isn’t to say that you shouldn’t be mindful of taxes in retirement, or that your retirement strategies shouldn’t include things like debt reduction or trying to maximize different investment pools, like TFSAs. It also doesn’t mean that there aren’t ways to be more sensible with your savings for retirement. What it does mean though is that realistic threats to your retirement are unlikely to come from having saved too much, and that concerns over your taxes being too high because you were good at saving your money is the literal definition of a first world problem. In short, don’t worry that your RRSPs are going to ruin your retirement when they will likely underpin a successful retirement plan.

What Your RRSP Should Have In Common With The CPP

rrsp-eggTo many Canadians the CPP is something that you simply receive when you turn 65, (or 70, or 60, depending on when you want or need it) with little consideration for how the program works or is run. That’s too bad because the CPP is successful, enlightening and puts its American counterpart, Social Security, to shame.

You’ve probably heard American politicians decrying the state of Social Security, claiming that it is broken and will one day run out of money. That’s a frightening prospect for those who will depend on it in the future. Social Security is a trust that buys US debt, and its use of US Treasuries (low risk debt issued by the US government) is crippling that program and even puts it at odds with attempts to improve government financial health (it’s more complicated than this, but it’s a useful guide). In comparison the CPP isn’t bound by the same restrictions, and operates as a sovereign wealth fund.

A sovereign wealth fund is simply a fancy way to describe a program that can buy assets, which is exactly what the CPP does. The Canada Pension Plan may be larger and more elaborate than your RRSP, but it can look very similar. The CPP has exposure to Canadian, American, European and Emerging Market equity. It invests in fixed income both domestically and abroad, and while it may also participate in private equity deals (like when the CPP bought Neiman Marcus) in essence the investments in the CPP are aiming to do exactly what your RRSP does.

CPP Breakdown

The big lesson here is really about risk though. The CPP is one of the 10 largest pension plans in the world. It’s wildly successful and is run in such a way as to be sustainable for the next 75 years. The same cannot be said for Social Security. But by taking the “safest” option Social Security is failing in its job and will run out of money by 2033. But by buying real assets and investing sensibly the CPP is far more likely to survive and continue to thrive through all of our lifetimes.

What’s also notable is what the CPP isn’t trying to do. It isn’t concentrated in Canada. It doesn’t need to get a substantial rate of return, and it doesn’t need every sector to outperform. It needs consistent returns to realize its goals, and that’s how it’s positioned. By being diversified and not trying to time the market, the CPP finds success for all Canadian investors.

I’ve said in conversation that if there was an opportunity to invest directly in the CPP I would take it. However until then the best thing investors can do is take the CPPs lessons to heart!

4 Reason Why Planning for Retirement is Getting Harder

How expensive is this Big Mac? More expensive than you might think...
How expensive is this Big Mac? More expensive than you might think…

For the enormous wave of Canadians that are on course to retire over the coming few decades, retiring and planning for retirement is getting harder.

Here are the four big reasons why!

1. Inflation

Inflation is the scary monster under the bed when it comes to one’s retirement. People living off of fixed pensions can be crippled by runaway costs of living, and naturally retirees dread the thought that their savings won’t keep pace with the cost of their groceries. But while historic inflation rates have been around 3.2% over the last hundred years, and have been around 2% (and less) over the past few years, inflation has been much higher in all the things that matter. Since the inflation rate is an aggregate number made up of a basket of goods that include big things like computers, fridges and televisions that have been dropping in price over time, those drops offset the rising price of gas, food and home costs. Since you buy food all the time and fridges almost never, the rate of inflation is skewed lower than your pocket book reflects.

You can show this in a simple way by comparing the price of a McDonald’s Big Mac over time. When the Big Mac was first introduced to Canada the price was .45¢, today that price is $5.25. Inflation has fluctuated a great deal since then, but let’s assume the historic rate of 3.2% was an accurate benchmark. If you apply that rate the price of a  Big Mac today would be $1.91, in reality the inflation rate on a Big Mac has been  much closer to 5.5%.

Canadian Inflation Rate from 2008 - 2014
Canadian Inflation Rate from 2008 – 2014

2. Interest Rates

The business of central bankers has gained greater attention since 2008, but for many making the connection between interest rates, the broader economy and their retirement is tenuous at best. The short story is that weak economies means low interest rates to spur borrowing. Borrowing, or fixed income products, have been the typical go-to engine for creating sustainable income in retirement, and low borrowing costs means low fixed income rates. The drying up of low risk investments that pay livable, regular income streams have left many retirees scratching their heads and wondering how they can keep market volatility at bay while still drawing an income. But as rates have stayed low, and will likely do into the future, bonds, GICs and annuities won’t be enough to cover most living costs, forcing retirees into higher risk sectors of the market.

Source: Bloomberg and FTSE TMX Global Debt Capital Markets, monthly data from July 31, 1989 to September 30, 2014, Courtesy of NEI Investments
Source: Bloomberg and FTSE TMX Global Debt Capital Markets, monthly data from July 31, 1989 to September 30, 2014, Courtesy of NEI Investments

3. Living Cost Creep

Guess what, the cost of living is going up, not just in real dollars, but because what we consider to be a “normal” number of things in our life keep expanding. Don’t believe me? When your parents retired they probably had a tv and an antenna for it. The cost of their tv was whatever they paid for it, and whatever it might be to replace it if it broke. By comparison most people today have moved into the realm of digital television, PVRs, and digital cable subscriptions. It’s almost unheard of today to not have a smartphone with a data plan and our homes are now filled with a wide assortment of goods and products that would have been inconceivable to a previous generation. The same is true for cars. While cars themselves cost less, prices are kept high by the growing feature creep that have slowly moved into the realm of necessity.

4. You Aren’t Dying Fast Enough

This appointment is wayyyy out in the future...
This appointment is wayyyy out in the future…

Don’t get me wrong, I’m not in a rush or anything; but the reality is that you are going to live a long time, and in good health. Where as retirement was once a brief respite before the angel of death swooped in to grab you maybe a year or two later, living into your 90s is going to be increasingly common, putting a beneficial, but very real strain on retirement plans.

In short, retirement is getting harder and harder to plan. You’re living longer, with higher costs and fewer low risk options to generate a steady income.

What Should You Do?

Currently the market itself has been responding to the low interest rate environment. A host of useful  products have been launched in the past few years that are addressing things like consistent and predictable income for those currently transitioning into retirement. Some of these products are able to reduce risk, while others explore non-traditional investments to generate income. But before you get hung up on what product you should have you should ensure that your retirement plan is meeting your needs and addressing the future. There is no product that can substitute for a comprehensive retirement and savings plan, so call your financial advisor today if you have questions (and yes, that includes us!)

Want to discuss your retirement? Send us an email and we’ll be in touch right away!

From The Desk of Brian Walker: The Hardest Part of Retirement

rrsp-eggThe moment you retire you are expected never work again.

Think about that for a minute. Every dollar you’ve ever EARNED has been EARNT. Your bank accounts will never be replenished again from your toil. All of your income from here on will be the result of your Canada Pension and OAS, any private pensions you are a part of and your savings. This is your life and your future boiled down to a number.

And as most companies stopped defined benefit pensions, many Canadians have had to turn (usually out of necessity) to investing in the market to grow and fund their retirement.

I have yet to retire, although I admit to being closer to it now than I was 20 years ago when I started this business, and I have to acknowledge that I find the prospect of retiring frightening. Work has occupied most of my life, and while I enjoy travelling and have a number of hobbies I have developed over the years I wonder if they can fill my days. But the thing that always sits at the back of my mind is about the money.

Because regardless of how well you have done in life there is always the potential to lose money in the markets, but so long as you are working you can replenish some of those losses. Once you have retired however, that’s all there is. A financial loss can be permanent in retirement and its impact will last the rest of you life, defining all your future decisions.

photoFor my currently retired and retiring clients the thing that has surprised me the most is that while these concerns are very present, they sit alongside a concern that should really be receding: market growth. For all the worry about protecting their retirement nest egg from severe downturns and unforeseen financial disasters, many investors are still thinking like they are accumulating wealth and have twenty years until they retire.

When it comes to investing, retirees need to be looking at investments that fit the bill of dependability and repeatability. Dividend paying stocks, balanced income funds and certain guaranteed products offer exactly that type of solution, kicking out regular, consistent income that you can rely on regardless of the market conditions. And as more and more Canadians head towards retirement we are seeing a growing base of useful products that fit these needs beyond the limited yield of GICs and Annuities.

The downside of these products is that they are all but certain to be constrained when it comes to growth. They simply will never grow at the rates of some companies, certain investments or aggressive markets by design. That’s a good thing, but nearly a quarter of a century of investing have instilled in many Canadians a Pavlovian response to the idea that investing must equal growth. But investors will be much better served by looking past desire for an ever expanding portfolio and towards investments that secure their long term income.

I’m not suggesting that once you retire you stop participating in the market, or that having any growth in your portfolio is wrong, or that it represents some kind of fault in your retirement planning. What is at stake though is controlling and protecting your savings and lifestyle by making your investment portfolio subservient to those needs over growth focused market participation. Your retirement could last almost as long as your entire working life, and easily as long as the amount of time you saved for your retirement. There will be plenty of things to worry about in retirement, and lots of other financial needs that must be addressed; from comprehensive estate planning to out-of-pocket health care costs. Why complicate your retirement needs by worrying about whether your are participating fully in bull markets, or worse, bear markets?

 

If you would like to discuss how we can help your retirement needs, or how we can re-tune an account for retirement please send us a note!