Getting real about retirement

Not saving enough? You have stark choices to make.

Gail Bebee 9 February, 2012 | 7:00PM
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The numbers are alarming, no matter the source. More than half (58%) of Canadians don't feel financially prepared for retirement, according to a recent ING DIRECT survey. Nearly six in 10 (59%) told TD Bank Group they have less than $100,000 in household financial assets. Canada Revenue Agency reported that only 26% of eligible tax-filers contributed to a registered retirement savings plan (RRSP) in 2010. Clearly, Canadians are not saving enough for retirement.

Those with workplace pensions -- 39.2% of all employees according to the latest available Statistics Canada data (2009) -- are in better shape than most. Count some 85% of public-sector employees in this privileged group.

By contrast, the vast majority (about 75%) of those toiling in the private sector are not members of a registered pension plan. These folks are left on their own when it comes to saving for retirement. Will they be able to put away enough money to provide an income equivalent to the pensions many public-sector employees enjoy?

To attempt to answer this question, let's consider the pension awaiting a fictitious federal employee we'll call John. He has worked for the government for 30 years and paid into the public-service pension plan during that time. His average salary for the five consecutive years of his highest paid service is $65,000, and this is the figure used to calculate his pension.

When John retires this year at age 65, he will receive an annual pension of $30,120, based on the rules of the Public Service Superannuation Act posted by the Treasury Board of Canada Secretariat. John's pension has some valuable features. Each January after retirement, his pension will be adjusted for inflation on the basis of increases in the Consumer Price Index.

Like the average Canadian employee, John will be eligible for Canada Pension Plan and Old Age Security benefits, which could yield up to $18,321 more in income. There is also a survivor benefit. If John predeceases his spouse, Marie, who is also 65, she will receive 50% of his basic pension entitlement for the rest of her life.

By purchasing an annuity with the proceeds of his RRSP, a Canadian worker without a pension can create an ongoing stream of income with many of the features of a public-service pension. An annuity is an insurance contract that guarantees regular income payments for a specified time period (usually the rest of the purchaser's life) in return for a specific sum of money. How much would a pension-less, soon-to-be retiree need to pay to purchase an annuity with benefits similar to John's public-service pension?

Insurance broker Rino Racanelli of provided some answers. He prepared a quote for an annuity with the following features: an annual income of $30,000 for a 65-year-old man, starting immediately, with annual 3% increases to compensate for inflation. Also, after the primary annuitant dies, the female spouse, also 65, will receive a 50% pension until her death. The cost, as quoted by five different insurance companies, ranged from $640,322 to $701,850, with Canada Life offering the lowest price.

Clearly, the amounts needed to match a public-sector pension far exceed the savings that most individuals have been able to accumulate. Among baby boomers (ages 47-64) who responded to the TD survey, 53% reported less than $100,000 in household financial assets (exclusive of company pensions, life-insurance policies and home equity). It would seem that a retirement income equivalent to even a relatively modest $30,000 public-service pension will be unattainable for many Canadians.

People who are not saving enough for retirement have some stark choices to make:

  • They could settle for a less comfortable retirement. By removing the inflation-protection feature, the above annuity could be purchased for $458,812, about $180,000 less than the version offering indexing for inflation. But, cheaper is not always better. Even at an annual inflation rate of just 2%, a retiree's purchasing power would decrease by 64% in 25 years.

  • They could retire later or continue working part-time after retirement. Health issues could easily arise that would preclude this option.

  • They could buckle down and save more for retirement.

This last option, to my mind, is the best choice. The question is, how much more to save?

Your financial advisor should be able to recommend a figure. Or, you could try out one of the dozens of retirement calculators of varying complexity available on the Internet. The Standard Retirement Calculator at is a good tool for quickly framing your retirement savings needs.

According to the calculator, a 50-year-old baby boomer with no workplace pension, $100,000 in an RRSP and a $65,000 salary would need to annually save 5% of his salary, $3,250, in his RRSP to retire at age 65 with an income of $30,000, including government pensions. Starting with a $50,000 RRSP, the required savings rate jumps to 12% or $7,800.

This is a challenging but not impossible financial commitment, which reinforces the need for immediate action. If government pensions were not factored into the calculation, the savings requirements would be even more onerous: 30% and 36% of salary respectively in the above examples. 

Saving enough money for retirement is one of the most pressing personal-finance issues now facing Canadians, especially those without pensions. Make this RRSP season the year you set explicit retirement-savings goals and start putting aside money to achieve them.

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About Author

Gail Bebee

Gail Bebee  Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at; her website is

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