Lack of Financial Education puts Retirement at Risk


Employee's who fail to learn how to manage their own retirement investments, and companies increasingly placing this burden on their workers, are combining to open a gap of under-funded pension plans and needy seniors.

In recent years, many companies have moved from more expensive Defined Benefit (DB) pensions towards alternatives such as Defined Contribution (DC) plans and group RRSP's.  What this means is that employees must be able to manage their own retirement plans and the sources of retirement income from personal savings.

Corporate governance guidelines have mandated that companies improve employee education communication and deliver more investment information and financial education. There is little evidence, however, that poor employee investment behavior is improving.

At the core of the problem is the inability of many Canadian workers to understand detailed plan summaries, pension statements, and investment performance numbers.

With this in mind, here are 10 simple tips for employees to help them retire on time:

  1. Live off your retirement income for six months before retirement and do any renovations or new car purchases before you leave your job (or have the money set aside).

  2. Continue building assets as a reserve for events like the rising cost of elderly extended care (and government cutbacks).

  3. Watch out for taxation costs if you decide to move to another province or country.

  4. If your retirement plan calls for you to work longer, leave a safety net for illness or family obligations that could incapacitate you and prevent you from working well into your 60's or 70's.

  5. Make sure your affairs are in order in the event of sudden death (wills, power of attorney, personal directives, living wills)

  6. Remember Inflation! At 3% inflation your buying power halves in 24 years.

  7. Hold a cash position in cash-equivalent investments, short term bonds, or high dividend paying equities for immediate and ongoing cash needs

  8. Protect against outliving your money.  A portfolio of 40% equity is considered to be reasonable for retires, generating a balance of income and growth

  9. If you expect to have a middle-upper class income in retirement, don't count on OAS.

  10. A couple with their income evenly split between the two, rather than all with one partner, will be in a better position to not have their OAS clawed back.