It may not have been what you would expect from a discussion panel entitled Influencing the Need for Retirement Savings, but one human resource expert says we already save too much for retirement.
Speaking at the annual IFIC Leadership Conference, panelist Malcolm Hamilton said the financial services industry has grossly exaggerated the amount of money retirees will need to maintain their standard of living.
“If you ask anyone, they want more than they have,” said Hamilton, a principal and worldwide partner at Mercer Human Resource Consulting. “If you look at the behaviour of seniors right up until today, the median retired couple spends about $35,000 a year. That’s not each — that’s the two of them combined.”
Hamilton said the common assumption is that spending is low because they’re constrained financially, but he notes that $35,000 is nowhere near indicative of what they can spend. Rather, he says, seniors are frugal and have a very high savings rate because most of the major debt-service expenses that they carried through life tend to be paid off by retirement.
Hamilton’s view was certainly the dissenting opinion on the panel of fund industry executives. The rest of the panel said retiring baby boomers will transform expectations of retirement as well as the services and products provided by the investment industry.
Earl Bederman, president of Investor Economics, emphasized that the level of wealth amassed by baby boomers is staggering.
“Eighty per cent of all financial wealth held by all Canadians is controlled by that group — about $1.9 trillion,” Bederman said. “Ten years out, they’ll collectively control 87% of all financial wealth, nearly $5 trillion dollars.”
Maintaining their asset base while retired will require a different approach to investing and saving. Already, Bederman said, boomers are driving a large shift in the investment industry, which is offering more products with downside protection and wealth accumulation for their retirement. This demand was driving the increase in income trusts before they were heavily taxed by the federal government and is currently driving sales in guaranteed minimum withdrawal benefit products.
“The research we have conducted indicates that people intend to spend the same amount in retirement as they did before they retired,” said panelist J. Roy Firth, executive vice-president at Manulife and the head of its Canadian wealth management division. “So, our research is showing that many Canadian [boomers] are saying no, we’re not prepared for retirement.”
Hamilton countered that the expectations of boomers are out of touch with the reality of what they will need. As they approach their late 50s, a higher proportion has their mortgages paid off and their children have become self-sufficient. The amount of money the boomers need will decrease substantially.
“For most of their adult life, they spent huge amounts of their income on mortgages and children — on average about 30% of their gross income,” Hamilton said. “It’s nice to retain the standard of living you had while you were working, but for many Canadians [having to earn more to pay down debt] is not actually something they enjoyed for most of their lives.”
Robert Strickland, president of Fidelity Investments Canada, said his company needs to respond to the marketplace, and that its research disagreed with Hamilton’s.
“The reality of the marketplace right now is they do have expectations of retirement that are far beyond their current amount of savings,” Strickland said. “For our company, there is a recognition that there needs to be a greater offering of products that help those people entering the spending phase of retirement with asset allocation and optimization.”
Even for retirees who are in the high-net-worth classification and pour money into accumulation vehicles when they retire, they are not doing so to maintain a standard of living, Hamilton said. Instead, they have the excess capital to take a risk with their savings and realize they can create a massive estate for their beneficiaries.
“We’ve done studies that look at wealthy seniors and how they spend that wealth. To make a long story short, they were saving and giving away more than 40% of after-tax income in retirement,” Hamilton says.
If there is a real need for innovation, Hamilton believes it’s in products that provide greater health care protection.
“The number one concern of retirees is health care. Number two is loneliness, from losing your spouse or having a shrinking circle of friends,” Hamilton said. “Those with the greatest retirement dissatisfaction are the ones with declining health.”