In my family, I’m the sixth of 16 cousins. There are 10 girls and six boys, and we range in age from the late 20s to early 40s. This holiday season my wish is for them to understand that it’s different this time. The challenges and realities we will face over the next 30 years and beyond will look nothing like those faced by our parents when they were our age. Our story will be different.
It’s different for us because we’re going to live longer than our parents. When our parents were born in the early 1940s, the life expectancy for men was about 63 years, and for women was slightly longer – about 66 years. Today, according to the CIA World Factbook, a woman born in Canada will live to the age of 84 while a man will live to age 79. This is an increase of 27%, or almost 20 years! With access to better health care, medical advances, better diets and clean water, we can and should expect the trend to continue.
Not only will the number of years we spend in retirement be longer, but we will also have to wait longer (and work longer!) before we are able to access government pension benefits. This year, the Government of Canada introduced measures to increase the OAS pension age of eligibility from 65 to 67. This will be fully in effect by the year 2029, when most of my generation are in our mid-50s. And my Italian cousins will suffer the same outcome; Pensions Outlook 2012 reports that increases in retirement ages are underway or planned in 28 out of the 34 OECD countries.
For those of my generation who have dreams of retiring early and accessing Canada Pension Plan (CPP) benefits before age 65, think again. Our parents were able to access CPP benefits beginning at age 60 with a penalty of 0.5% reduction for each month before age 65. This year the Government of Canada made changes to the CPP to reflect the new demographic reality. The penalty for early access to CPP will be increased over the next four years to 0.6% per month. All things being equal, and assuming today’s maximum CPP payment amounts ($986.67/month or $11,840/year), our CPP annual pension at age 60 will be $700 less than our parents’ at the same age.
Not exactly exciting holiday time conversation to fuel the festivities, I know! And the last thing I would want is for us to spend quality family time lamenting the passing of the good old days and feeling nostalgic for what should have been.
I hope we can accept that it will be different for us – not better, not worse, just different. We’re going to live longer, yes, but we’re also going to have to work harder and be more disciplined in our personal money management to achieve the same kind of lifestyle (or a better one!) as our parents in retirement. From a financial planning perspective, this means we must consistently increase our overall net worth by increasing our investable assets (e.g., RRSP, TFSA and taxable accounts) and decreasing our liabilities (e.g., mortgage). From an investment counselling perspective, the key for us to survive the challenges of our retirement days is to spend more time thinking about and implementing a strategic investment plan that will ensure we have the flexibility to live the kind of retirement lifestyle we want.
Warren Buffett likes to say that we are lucky to have been born at a time and place where we have the ability and freedom to allocate our capital for our benefit. Moreover, we live in a time and place where good capital allocation skills are aptly rewarded. My wish for me and my cousins is to be sitting around a table in 30 years as a family saying we knew it would be different, and we did something about it.