By the age of 63 most Canadians have pulled in their shingle and pulled out their armchairs, but as many as one-fifth of Canadians with private pension plans are drawing benefits in their 50s, according to a recent Statistics Canada report.
According to the report after a decade-long decline, retirement ages seem to have stabilized. The average Canadian male retires at age 62, while the average woman retires about a year earlier. In 1976 — and even as late as the mid-1980s — both men and women retired at about 65.
As one might expect, the select few pensioners who are able to retire early typically leave high-paying jobs. These young pensioners typically bring in about two-thirds of their pre-retirement income the year after they begin collecting their pension, which StatCan says is close to the 70% replacement rate recommended by many financial institutions.
It’s worth noting that many of these people who collect pensions early, will end up back in the workforce. Among those who started receiving pensions at 50 in 2003, StatCan notes that 71% earned some employment income the following year. Still, those with pensions tend to be better off than those without. For instance, StatCan reports that “at age of 59, only 46% of pensioners earned employment income, compared with 76% of their working counterparts.”
In the case of early retirees, over 60% of their retirement income comes from pension benefit, StatCan notes. Employment earnings (24%) and other market income, mainly from RRSP withdrawals and other investments (10%) make up the rest.
Still, drawing income from a pension early could pose a challenge for some Canadians, particularly if it impedes their ability to put additional funds into an RRSP or non-registered assets aimed at providing income in retirement.
Advisors need to take inventory of their client’s expectations, which includes discussing what life changes a client expects at retirement, says David Ablett, Investors Group’s senior tax and retirement planning specialist. Failing to save through those years could force them to reduce their expectations. The best time to broach the issue with clients is when they are in their 30s and 40s, he adds.
Pension plans can’t be overlooked. To that point, Ablett is a firm believer in convincing clients to take full advantage of pension plans where they are available. “Every individual working for an employer with a pension plan should be taking maximum advantage of that plan,” says Ablett. By maximizing the contribution to the plan, advisors can remind clients that will get the additional tax deduction and the employer to match.
If clients still need an incentive, they need look no further than the benefits enjoyed by public sector employees like civil servants and teachers. Those are the people who are going to be able to retire early, Ablett says.
Nearly half of all Canadians are banking on their employer sponsored pension plans to be part of their retirement mix, according to a recent Decima Research survey conducted for Investors Group. The problem is, half of the people who contribute to an employer-sponsored plan don’t know what they’re getting.
Most Canadian’s don’t know if they are in a defined benefit plan, where members are guaranteed a specific amount during retirement, often based on salary and years of service, or a defined contribution plan, which has a less clear notion of what it will pay out in retirement income.
That doesn’t surprise Ablett. As someone who was once actively involved in pension administration, he says most individuals just take the information they receive on their pension and file it away after only a short glace.
Talking about pensions and working that into a plan presents a good opportunity for financial advisors to demonstrate their value to clients, says Ablett.
Interestingly, the Decima survey also found that only 15% of Canadians will use insurance as a source of retirement income and only 17% will use annuities.
“It’s very likely that the people who do use insurance or are taking advantage of annuities are being advised to do so,” he says. “People who do not have financial planners are almost never aware that these are other ways to finance your retirement.”
These numbers aren’t improving, as far as Ablett can tell. “It shows that both financial planners and companies have room to improve when it comes to communication.”