Are Canadians financially literate about retirement plans?

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The Baby-Boom generation is getting ready to retire. It’s a big concern and a big issue, simply because that generation has been the dominant demographic since the late ’60s. And now they’re starting to feel the anxiety. Some are already enjoying their new “career after their career.” But others wonder whether they’ll have enough money, what to do if their health fails, and how to avoid turning their golden years into the rusty years. This month is Financial Literacy Month in Canada, and sadly, many Canadians are getting a failing grade on the most important personal financial question of all: retirement.

This highlights an important point about retirement readiness and financial literacy. A study earlier this year from Statistics Canada reported that retirement preparedness rates have actually fallen. In 2014, the year of the survey, 78% of labour market participants between 25 and 64 reported they were financially preparing for retirement. Sounds like a big number, but that’s actually down from the 81% rate reported in 2009. And only 45% of participants said they know how much they needed to save for retirement.

And here’s where the question of financial literacy comes in. In 2014, the average score in a financial literacy quiz for those who were preparing for retirement was 67% compared with 54% for those who were not preparing. Unfortunately, the age group that saw the biggest drop in retirement preparation between 2009 and 2014 were those in the 25 to 34 age group, whose rate fell to 66% from 75%.

Here are key retirement planning questions to consider:

Is it too late to think about financial planning on the verge of retirement?

The short answer is that it’s never too late to make a financial plan. In fact, you may be in the best position to do so now, since you’ve already accumulated a nest-egg and you appear to be debt-free. But now you have to deal with the fact that women are living longer than ever – many well into their 90s. In fact, chances are good that you’ll spend just as long in “retirement” as you did in raising a family, working, and building a career. And that raises some very important financial questions.

Will I outlive my money?

That’s the question most retired people ask us. As you age, healthcare costs rise, and the question of long-term care can become a problem. Will you be able to afford to stay in your home? Will the income from your savings and pensions cover your expenses? Someone with a good-sized nest-egg in RRSPs and TFSAs and non-registered accounts, and with a home that’s paid off, needn’t worry too much. You’ll probably have a net worth somewhere between $500,000 and $1 million. Those assets can be effectively allocated to produce both enough income and enough growth to see you through your old age. Those with investable assets of about $300,000 and a mortgage-free home are probably still okay. When you start to get below that threshold, your situation is getting dicey.

Will my standard of living fall?

Because of longer life expectancies, women especially will very likely spend 15 years or more in widowhood after the death of their husband. And many worry that this will result in a much lower standard of living. This is a major problem for many women who have done little or no financial planning prior to retirement. But with the right combination of life insurance and estate planning, proper allocation of family investment assets, and a realistic assessment of health and lifestyle, it is possible to keep ahead of inflation and enjoy retirement with no decline in your standard of living.

Will I be able to afford adequate healthcare?

Healthcare costs and medical expenses naturally rise as you age. Government or other retirement plan benefits may cover basic levels of care and some medication. The big question is whether you will be able to afford those inevitable extras as they arise, without dipping into your retirement savings. Some judicious planning for these eventualities, including considering critical care insurance at the pre-retirement stage, will help alleviate concerns.

Long-term care down the road is one of the biggest challenges facing retirees as they age. If you suffer a serious loss of functionality through chronic disability, will you be able to afford a high level of quality long-term care in a nursing facility or from in-home caregivers? With private long-term nursing care facilities costing $70,000 or more a year, would your savings last? Again, much depends on your personal situation, and whether you have insurance coverage, but it may be worth looking into a long-term care insurance policy to supplement your other retirement income.

The key here is to develop a plan that matches potential cash flow needs with your future income stream to ensure you are not overinsured, and thus paying premiums needlessly.

Will inflation erode my savings?

Since 1993, inflation in Canada has averaged about 2% per year. That means that every year, a dollar buys 2% less than it did the previous year. In other words, your nest-egg will have to grow a minimum 2% every year after tax, just to maintain your purchasing power. It will have to return more than that if you want your money to keep growing to provide for you as you age. A well-founded financial plan will build-in appropriate investment portfolio asset allocation that ensures a return greater than taxes and inflation. And that should provide a strong level of comfort through your retirement and old age.

Courtesy Fundata Canada Inc. © 2016. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss. No promise of performance is made or implied.