Downturn has more Canadians reconsidering retirement

By Mark Noble | November 20, 2008 | Last updated on November 20, 2008
4 min read

The retirement dreams of more Canadians are inching further away from the blue ocean of Caribbean winters and looking more like the blue smock donned by Wal-Mart employees, a survey by Desjardins Financial Security suggests.

More than 3,500 Canadians took part in two surveys, one that was held in the summer, and the other in late October. Desjardins found that since the downturn hit full steam between the two groups of results, there has been a marked difference in retirement worries amongst Canadians.

A significant number of respondents (42%) said they are now planning to postpone their retirement by an average of 5.9 years. Amongst women, 50% said they were planning to postpone retirement.

“The current market downturn has got people a little bit scared. If you look at your statement and see all your investments are down 30%, you’re probably thinking, I’ve got to make some changes. [Otherwise, my options] could be to retire at age 80 or — and this is being a little bit facetious — I might have to look for part-time work at Wal-Mart as a greeter when I do retire,” says Mike Aziz, regional vice-president of savings products for Desjardins.

Reducing spending and increasing savings seems to be the primary theme for how Canadians intend to re-orient their retirement plans. Even before the worst of the downturn, respondents in the summer indicated they were significantly transforming their spending habits.

To increase retirement savings, the vast majority (83%) said they would be postponing any major purchases or expenses that required financing or using credit. A strong majority (77%) of respondents will take less expensive vacations, and 69% are going to be looking at bringing a lunch from home rather than eating out.

But things aren’t so desperate that people are willing to cut back on non-essential — yet extremely meaningful — expenses. Only 35% of respondents said they would consider decreasing spending on their children’s extracurricular activities.

Probably more instructive is what factors will go into the decision-making of Canadian investors going forward. Respondents over 40 indicated some preferences towards stability in both the types of investments they use and the firms they deal with.

Nearly half (47%) of respondents over the age of 40 said the financial strength of their institution would be very important to them when selecting savings and investment vehicles over the next year. Almost the same number (48%) said they would be looking for products that provided guarantees on the capital they invested.

Desjardins is positioning itself to capitalize on increased interest in guaranteed products. The company has been aggressively marketing its Helios line of guaranteed minimum withdrawal products, which provides a guaranteed source of income, can lock in investment returns, and offers principal protection.

Considering how far the market has fallen from the summer, it probably would have been a much better proposition to invest in these when the market, particularly the Canadian stock market, was riding at record high levels. Investors would have been able to lock in gains then and avoid the brunt of the downturn.

Aziz stresses that the certainty these products provide remains of considerable value for Canadian investors uncertain about the future of their savings.

“I know that my income from government plans is going to be X-dollars, and then I’ll know that my income from Desjardins guaranteed minimum withdrawal benefit GMWB or guaranteed life withdrawal benefit (GLWB) is going to be Y-dollars. If my goal is to have $50,000 net retirement for life, there’s no shortfall to make that up. I already know what I have to save to get to that level,” he says. “Helios’s sales are having a record year right now. Advisors who are predominantly fund guys are looking at the GMWB and GLWB products and calling, because their investors are calling them and asking for these products.”

On December 1, Aziz says the second generation of its Helios products will be available. It will include a lifetime income benefit of 5% if the first withdrawal happens at age 65. Clients will be able to immediately start making withdrawals at age 45 at a 4.0% annualized rate if they wish. A 7% bonus will be added to the total amount used to calculate the investor’s guaranteed retirement income every year for the first 10 years, provided no withdrawals are made.

“If you open up your statement and you’re down 30%, some people say yes, I’ll sit out and ride the storm. Most people are going to be really frustrated because they have worked hard for their money and they have watched it evaporate. For those that don’t want to ride it out they have three options. They can take their money and put in their mattress. That’s not a preferred option. They could put the money in a GIC, which is okay — you’ll earn 3% or 4% on a GIC,” he says. “We believe what is best for most clients is the GLWB product. You are getting certainty, you’re getting a certain amount of growth with our bonus, and you’re getting a lifetime income.”

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Mark Noble