New ways for baby boomers to save for retirement

It’s hard to pick up a newspaper or magazine or turn on the television or radio today without hearing another report that Canada’s aging baby boom generation is not financially prepared for retirement.

Baby boomers represent one-third of the more than 31 million Canadians and it’s estimated that 20 per cent of Canada’s population will be over 65 by 2020.

A recent report by the Life Insurance Marketing Research Association and the Society of Actuaries concluded that future retirees will be forced to take more responsibility for their retirement than previous generations.

One of the main reasons for this lack of preparedness is fewer Canadians are covered by a registered pension plan.

Between 1991 and 2004, the number of paid workers covered by an RPP declined to 39 per cent from 45.3 per cent. At the same time, the proportion of workers covered by defined benefit pension plans is declining. More and more employers are offering some form of defined contribution plans, which transfer the risk of providing sufficient retirement income from the employer to the employee.

The result may be lower benefits at retirement than defined benefit plans.

Canadians don’t seem to be taking measures to compensate for insufficient employer pensions. A recent study concluded that two-thirds of Canadian households expecting to retire in 2030 are not saving enough to meet necessary living expenses such as food, shelter, clothing, transportation, health care, energy and taxes.

To generate sufficient income in retirement to pay for these expenses, retired Canadians will need some combination of Old Age Security, Canada and Quebec Pension Plans, home ownership, participation in a workplace pension plan and savings through a registered retirement savings plan, as well as non-registered savings.

Is there hope for aging boomers moving into retirement to squirrel away enough money and build a large enough nest for their retirement?

The last two federal budgets have contained tax and other measures that allow and encourage Canadians to save more for their retirement.

“For many years, Canadians were financially conservative, saving more than their counterparts south of the border,” said Ian Niven, managing director of investment management with BMO Harris Private Banking.

“But over the last five or seven years, Canadians have been spending their money more freely and their level of savings has dropped,” Niven said. “There has been a real attempt by the finance department to get people to invest and create their own financial nest eggs so they can become less reliant on government for support.”

The most recent government initiative was the new tax-free savings account (TFSA) in the 2008 budget. Starting in 2009, Canadians 18 and older will be able to put up to $5,000 a year in a TFSA in virtually any sort of investment and all investment income generated will be tax-free, including when the funds are withdrawn.

TFSAs will have lots of appeal to Canadians. Seniors will be able to use these accounts to have access to tax-free income while not affecting their eligibility to receive Old Age Security.

It also has appeal for those in their prime accumulating years and those who are actively building retirement assets.

Other important changes introduced in the last two years include income-splitting for seniors, raising the RRSP age limit to 71 from 69, measures that encourage older workers to stay in the workforce and continue to receive partial pensions and accrue further pension benefits, and measures that give people on government assistance incentive to get into the workforce and establish careers.

“The government has finally broken down and adapted to the reality of what’s going on in retirement today,” said Niven.

Good news for us aging boomers.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.