Boomers must lower expectations or save more: Survey

For many of Canada’s baby boomers, their perception of retirement will not match reality unless they start saving more, according to a new study put out by Fidelity Investments Canada.

According to the 2007/2008 Fidelity Retirement Survey, which polled 1,000 Canadians who were age 45 or older, the majority of employed Canadian baby boomers — 64% — plan to maintain their standard of living in retirement.

Six per cent of survey respondents plan to increase their standard of living, while 22% plan on downsizing in retirement.

Peter Drake, vice-president of Economic and Retirement Research for Fidelity Investments Canada, notes that investors need to meet a benchmark of being able to replace 75% to 80% of their pre-retirement income. But the savings rate of the median boomer falls well below that.

“From the Fidelity retirement index that we did last October, we know that boomers are on track to replace 55% of their pre-retirement income. That’s the median,” he says. “There is a gap. I think the question is out there — what are [the boomers] going to change? Are they going to change their aspirations, or are they going to increase their level of savings and investing to be ready for retirement?”

If the experience of current retirees is any indication, downgrading expectations is something many have been forced to do. Of the respondents to the survey who were actually retired, 47% indicated they continued to live like they did before retirement. Meanwhile, an additional 42% downsized their standard of living after retiring.

Comparing employed boomers to retirees is a bit of a problematic comparison because their savings habits are different, according to Ted Rechtshaffen, a CFP and president of TriDelta Financial Partners.

Rechtshaffen says within the baby-boomer demographic there is divide, where the older members of the demographic, those roughly 55 or older, tend to exhibit the more conservative aspirations of the preceding generations, which he refers to as the “classic Canadian retiree.” They tend to have high savings rates and a relatively frugal lifestyle so have subsequently amassed much more than they need for their retirement.

In fact, to ensure clients don’t live poor and die rich, Rechtshaffen actually has to convince some clients to spend more.

“As a stereotype, older boomers are very worried about retirement and having enough money. They tend to be savers. Tend to have significantly benefited from buying a house 25 to 30 years ago and were able to cash in on that real estate cash free,” he says. “They tend to be a group that has a higher proportion of defined benefit pension plans. They have grown up frightened and very nervous about their financial situation.”

Rechtshaffen says younger boomers much better fit the profile the Fidelity study outlines.

“When you [look at] people in their 40’s, or maybe early 50’s, they grew up with things differently. They have much less fear of debt and are more comfortable spending money,” he says. “Far fewer of these boomers have defined benefit pension plans, and because they are used to more debt and a higher standard of living, they are going to struggle more in retirement to meet their expectations.”

The survey shows only one in five baby boomers (23%) has a retirement income plan that clearly tells them where their money will be coming from in retirement and where it might be going. Drake says retirement income planning is a relatively new and time-consuming area of planning but is nonetheless imperative.

“Planning for your retirement involves more than saving for it,” says Drake. “By age 55, I think you should at least have something down on paper for a retirement income plan. Clients may retire shortly thereafter, or they may keep going past the median retirement. The whole thing about having a plan is that you can discover early what’s wrong and you can fix things along the way.”

Drake says advisors need to help clients create a plan through which they fund their essential expenses from the most stable forms of income, such as pension plans, and then try to find other ways to create a cash flow for discretionary expenses. Of course, these can vary greatly, and boomers’ expectations of the expenses don’t seem to fall in line with the costs actual retirees are paying.

For instance, the survey found 45% of boomers believe they will spend less on housing costs for their primary residence in retirement. However, retirees report the opposite is true, with 69% saying they have actually spent the same or even more on housing costs in retirement. Boomer expectations of health-care costs, though, did seem to fall in line with the reality being faced by retirees.

“Fidelity’s research indicates that the majority of Canadian baby boomers believe that their health-care spending will remain the same or increase in retirement,” Drake says. “However, there are other areas, such as potentially rising housing costs, that boomers need to consider in their retirement planning. Just because you are retired does not mean that down the road you won’t need to spend money on upkeep and repair on your home.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(02/19/08)