Prior to the 20th century, the majority of people lived and worked until they died, on their family farms. With industrialization came urbanization and the specialization of labour. Companies were formed, labour unions were established and eventually the concept of companies providing a lifetime pension to retired workers was implemented. Along with this came government retirement benefits. With long periods of relatively stable interest rates and moderate inflation, companies and governments were able to establish actuarial calculations for required capital savings to pay retired employees until their demise. However, today's economic environment is challenging the ability of governments and individuals to fund a respectable retirement. It can still be accomplished, but traditional strategies and assumptions need to be cast away in favour of more savings discipline and dividend oriented investments.
With life expectancies in the late 60s and early 70s for most men back in the post WWII era and until the 1960s, financing retirement was affordable for most employers. However, with medical advancements, and widely available and affordable health care, life expectancies lengthened significantly. In addition, globalization of trade created great competition, reducing corporate profit margins significantly. Additionally, Governments implemented a host of social entitlement programs over the last half century creating a great tax burden for their residents.
The innovation of the birth control pill, caused a collapse in the fertility rate which has resulted in our population aging rapidly as we are unable to replenish our own population.
During the last 30 years, interest rates and inflation have ranged wildly with recurring economic crisis which has resulted in the inability of corporations to fund their pension plans. The responsibility of retirement funding has now been transferred to employees through the innovation of Group RSPs or Money Purchase/defined contribution pension plans, replacing the Defined Benefit Pensions. Defined Benefit Pensions are now the domain of a small number of companies and government departments.
With short term interest rates of under 1% and 10 year bond yields in the range of 2%, the amount of money required to fund a 20 to 30 year retirement has ballooned to levels most residents have little chance of achieving by saving exclusively in bank-offered guaranteed investments and bonds.
It is now the norm for most savers to invest in stocks, bond, commodities, mutual funds and other market-oriented investment vehicles. Where once investors lacked access to financial information, they now have too much to sort and digest, let alone understand and place into perspective. That plus the volatility of the stock market the last decade has left most investors scratching their heads and what to do next.
With the leading edge of the baby-boomers now turning 65, this 20-year large cohort will be moving through the retirement years for the next 30 years. This, plus near-zero interest rates, have created a retirement funding crisis.
In place of government bonds, investors need to embrace dividend-oriented investments and corporate bonds. Most importantly, people need a competent financial advisor to help them maintain perspective at all times and not panic into major asset allocation changes at the wrong time.
Most people have not saved enough to fund their retirement, instead having focused on lifestyle and housing expenses. Retirement funding requires a 20-40 year commitment to saving and investing wisely.
It is critical for investors to seek out a competent financial advisor to assist them in creating a retirement plan, utilizing a comprehensive and well-structured portfolio management system. For optimal results, people should strive to save 15 to 20% of their take-home earnings for retirement. If that seems like a great deal, consider that if this sacrifice doesn't occur during your working years, the cut in pay when you reach retirement can be over 60% as the average Canadian will only receive $12,000 from government retirement programs.
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John Soutsos, Senior Financial Consultant, Investment Planning Counsel
