Crossgrove Blog

How to make up for the retirement income gap when pensions won’t be enough

Fri, Dec 9, 2022 5:00 PM GMT

Pensions were not something many Canadians talked about until retirement was around the corner, but with the high-cost of living and unaffordable housing, conversations about what retirement will look like are coming up more often and at an earlier age.

Sometimes called the “three pillars of retirement,” retirement income usually comes from three main sources – government pensions, including the Canada Pension Plan (CPP) or Quebec Pension Plan and Old Age Security (OAS); employer-sponsored pension plans; and/or personal savings and investments.

However, many no longer have access to employer pensions as a lot more people are doing contract work and/or are self-employed.

“While it used to be that clients were maybe worried that their pension wasn’t going to be enough, over the past 15 years we’ve encountered more clients who simply don’t have a pension [through their employer],” says Tom Gilman, senior wealth advisor and senior portfolio manager with Gilman Deters Private Wealth at Harbourfront Wealth Management Inc. in Vancouver.

The ideal situation at retirement is that the monthly income generated from these pillars is enough to sustain a client’s lifestyle without going into debt. But that’s becoming harder to rely on as many are concerned about whether there will be enough money left in the pension pool when it’s their time to retire. So, the client becomes responsible for making investments and smart money choices that set them up for these golden years.

Even the existing government-backed pensions won’t be enough to support many retirees. The maximum monthly amount of CPP an individual could receive today as a new recipient is $1,253.59. In fact, the average amount paid to a new retiree in July was $727.61.

“Those clients with pensions from work tend to be more confident because having that option is so rare these days,” Mr. Gilman says.

He says the first step is to look at all the sources of income at the client’s disposal when they retire and identify any shortfalls. There are most likely to be shortfalls and it’s important to consider how to make up those gaps – either through investments or savings.

One of the aspects of retirement that Mr. Gilman educates his clients about is the different savings vehicles that exist and the attributes they possess that lend themselves to an individual’s unique circumstance.

“It’s important for clients to understand that their income tax profile is the most important factor in determining which vehicle they should choose for saving,” he says. “The [registered retirement savings plan (RRSP)] remains the stalwart investment [vehicle] for Canadians … but [the tax-free savings account] can be another option.”

Mr. Gilman says clients can sometimes confuse these accounts for investments, so it’s important to make sure they know these are places to park their savings or “pots,” not investments in and of themselves.

“Each of these pots has different income tax treatment, which should be considered carefully in line with an investor’s risk tolerance and time horizon,” he says, adding that it’s important to explain the difference between the accounts, the tax implications at the time of withdrawal and the expectations for growth.

“For example, a client approaching retirement may want to capitalize on their last years of high-income earnings to receive a tax deduction.”

Other options to generate income

There’s also the option of an individual pension plan (IPP), which is similar to an RRSP but set up mainly for business owners. And while they can be a good way to save for their retirement, the major downside comes from the fact they’re often costlier and more complex to set up and maintain than an RRSP.

Laura Barclay, senior portfolio manager at TD Wealth Private Investment Counsel in Markham Ont., says she rarely sees the IPP option being used with her clients and adds that there are other options to generate income in retirement.

For her, the holdings that best mimic a pension plan with stable, long-term payments are high-quality, blue-chip dividend-paying stocks.

“When I’m building a portfolio for a client, who is going to be living off of this wealth sometime in the future I want to look at high-quality companies. It’s also very important that it’s diversified,” Ms. Barclay says.

“I’m focused on companies that pay dividends and are growing. So, I’m looking for companies with growing earnings, which looks like growing free cash flow because that’s what allows a company to grow their dividends.”

Clients also need to be made aware of any fees that come along with these funds or any that might be paid out to the advisors, Ms. Barclay adds.

Using a conservative approach

When it comes to investments to fuel his own retirement, Harp Sandhu, financial advisor with the Sandhu Advisory Group at Raymond James Ltd. in Victoria, takes, what he calls “the tortoise approach,” meaning slow and steady wins the race. He advises his clients to do the same.

He notes that he gets clients who are maybe starting to save for retirement a little later in life, so they might be willing to take more risks. However, he advises against it.

“I’ve had clients that reach out and say, ‘Hey, I was looking at these different [exchange-traded funds] and they have 12 per cent distributions and that’ll be perfect for my retirement,’” he says. “My response is usually, ‘Well, no, because let’s look at what can go wrong.’”

Mr. Sandhu says he uses a conservative 6 per cent rate of return on equities “even though the long-term markets have averaged in that 8 to 9 per cent range.

“You stretch out how long they’re going to live, how much they’re going to spend and you aim low on how much they’re going to make in returns,” he says.

“That way, if the plan’s going to work under that situation, it will be in a real-world scenario.”


Reference: Globe and Mail