3 retirement planning strategies

The government is cutting benefits, but you can fight back. Here's how to make sure you have enough for the retirement you want.

(Photo: Oliver Cleve/Getty)

As Canada’s official retirement age rises, you’ll probably start wondering how that will affect your financial planning. Most Canadians should be able to cope with a higher age of eligibility for Old Age Security (OAS) without hardship. But when you combine that change with other adverse trends, it quickly becomes clear that there will be a real impact, and you will have to adjust your retirement expectations.

First, let’s consider OAS in isolation. The maximum OAS payout is currently about $6,500 per senior per year. So pushing back OAS back by two years would cost you about $13,000 in today’s dollars. Most Canadians can absorb that hit without too much difficulty if they spread the impact over many years. (It has a more powerful effect on low-income Canadians who also rely on the OAS’s sister program, the Guaranteed Income Supplement, which presumably would also start later.)

Specifically, there are three ways you can adjust to a delay in getting OAS:

¦ Save a little more each year Over the 20 years before you retire, you would need to stash away an extra $500 a year, plus inflation adjustments, to compensate for a two-year delay in OAS (assuming a conservative 5% return, and inflation of 2.5 %).
¦ Spend a little less in retirement If you can’t save more, you can spend less after you retire. If you spread the spending impact over your entire retirement, you would need to cut your spending back by about $520 per year in today’s dollars.
¦ Work a little longer If neither of those scenarios sounds appetizing, the good news is you would only need to delay your retirement by a few months if you worked full-time, give or take, depending on your salary.

So, by itself, pushing back OAS won’t shatter your plans. However, the bigger concern is that this is one more threat to your retirement nest egg, on top of low interest rates, a low-growth economic outlook, uncertain stock markets and potential government cuts to other programs, such as health care and nursing-home subsidies.

With all of those things in mind, it makes sense to be a bit more conservative when planning for retirement than you might have been a few years ago. Any combination of the three classic approaches to catching up I outlined above can do it for you. However, my guess is that most Canadians will react to the adverse trends by working a little longer, rather than by saving more or spending less. Canadians have gotten used to the idea that they can usually afford to retire in their early 60s (except for civil servants, who can usually retire earlier because of generous public-sector pensions). I expect retiring a bit closer to 65 will become the norm for Canadians working in the private sector.

That’s not cheery news, but keep it in perspective. Canadians are living longer—life expectancy is increasing at the rate of roughly one year per decade. So while on average you might not be able to retire quite as early as your parents did, chances are you’ll enjoy a retirement that’s just as long. It just might start a little later.

Besides, there are other ways to compensate for the reduced government benefits if you use a bit of creativity. For example, carefully prioritizing your retirement spending will probably allow you to fulfil your most important retirement dreams, even if you can’t do the full bucket list. And you may need less money to retire on than you thought to begin with. Many financial advisers say you need a retirement income that amounts to about 70% of what you earned in your peak earning years. But statistics show that retired Canadian couples can live well on about 50% to 60% of what they earned in their peak years. So even if you do get less help from the government, you might find that comfortable retirement is closer than you realize.

David Aston, CFA, CMA, MA, is a retirement expert at MoneySense magazine.