Beware of doom-and-gloom retirement warnings
By ROB CARRICK
Thursday, February 3, 2005 Page - B19
There is no RRSP season for smart investors.
They make automatic monthly contributions to their registered retirement savings plans, which means there's no harried runup to the deadline at the beginning of March. Congratulations to the few people in Canada who do this. As for everyone else, procrastination has its perils.
Tops on the list is your susceptibility to a deluge of advertising designed to sell financial advice, mutual funds and such. All these ads purport to sell the dream of a retirement of travel and leisure, but that's just marketing gloss. The companies sponsoring the ads just want your money. Fair enough.
If you deal with these companies as an informed consumer, you can certainly retire well. The trick is to learn about retirement from a source that isn't compromised by a desire to sell you something.
One good source is the just-released second edition of Smoke and Mirrors, Financial Myths that will Ruin Your Retirement (Self-Counsel Press, $16.95) . Author David Trahair is a chartered accountant with nothing to sell but his ideas on how the financial industry misleads people about what it takes to retire comfortably.
"I'm not even licensed to sell anything like mutual funds, investments, insurance or anything, nor do I want to be licensed to do that. The minute I do that, there's going to be an incentive to spit out one message over another."
Mr. Trahair starts off by tackling the pervasive myth that a comfortable retirement requires an income equal to 70 per cent of what you made at the end of your working life. There's nothing wrong with saving enough to reach this threshold, but the cost and strain on your family finances would be considerable. If your income were $120,000 before you retire, then you'd need to save enough to pay out $84,000 a year, using the 70-per-cent formula. Mr. Trahair estimates that you'd need to amass savings of $1.68-million to do that, assuming a 5-per-cent rate of return.
In real life, you can probably get away with saving quite a bit less. One reason cited by Mr. Trahair is the $15,000 or so maximum paid out by the Canada Pension Plan and Old Age Security, both of which adjust payments for inflation on a regular basis.
Quick aside: If you want a quick test to see if your financial planner or investment adviser is primarily a salesperson, Mr. Trahair suggests you ask for their views on whether the CPP and OAS will be around when you retire. "If they say, 'Oh, forget it, they aren't going to be around,' that's a dead giveaway."
Another reason why you may not need 70 per cent of your working income in retirement is that people tend to spend a lot less after they leave the work force.
"If you have a mortgage, if you're saving for your kids to go to university, if you're contributing to RRSPs, if you've got CPP and EI being withheld from your pay cheque, those expenses are not going to be there once you've retired."
Smoke and Mirrors offers the example of a couple with a household income of $100,000 and expenses amounting to $67,486 a year. Mr. Trahair shows how this cash outflow could fall to $33,957 in retirement, allowing this couple to live off an income equal to 40 per cent of their working salaries.
The key concept here is one that Mr. Trahair draws from his accounting background: "The absence of a cash outflow is as good as a cash inflow." This is all the more true when you compare a reduction in living expenses against money coming in from an RRSP. You get the full benefit of the reduction, but the RRSP cash inflow is subject to tax.
If you haven't heard of the 70-per-cent rule, you've certainly heard financial types talk about maximizing your RRSP contribution.
"I say to optimize your RRSP contribution, rather than maximize," Mr. Trahair says. To help, his book comes with a CD containing spreadsheet programs that you can use to track your current expenses, project after-retirement expenses and then look at how much you need to save.
Smoke and Mirrors suggests you pay down debts before making RRSP contributions, especially "bad" debts like credit card balances. Mr. Trahair also offers general advice about insurance and mortgages, but he's at his best in debunking the financial industry's retirement myths.
As for those ads that financial companies pump out during RRSP season, he's disdainful but also philosophical. "It's a trick, it's emotion-driven selling," he said. "But you really can't blame them. The banks really aren't in business to ensure our comfortable retirement, they're in business to maximize shareholder value."
