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Why retirement planning?

Why Retirement Planning?

Used to be -- a worker reached 65 years of age and retired. He got a watch, a pension, perhaps a farewell party and a speech -- and then he went into retirement. This has been the picture of retirement for our grandfathers and generations before.

During our parents' generation, things changed. For the first time, since the days of Bismark (who introduced the concept of retirement to the workplace) -- our parents had an option. Many of them could choose to retire early. In fact, most of them did. Due to a longer and healthier life span, most are looking at living in retirement for a long time to come -- perhaps twenty to thirty percent of their life span. Some are looking at second careers, going back to school, or starting a business.

For the generation that is currently retiring and those that are to follow, there are more changes on the horizon.

The changes that are now occurring will greatly affect the way we, and our employees retire -- and the way we conduct our business.

Number and Things

In Canada, there are three unrelated demographic changes occurring simultaneously. The dynamics of these changes will affect all of us in our retirement.

First, we are living longer. In the 1700's life expectancy was 35 years. By the late 1800's, it was 45 years. At the turn of the century, it was 47 years. Today, it is approximately 76 years and increasing rapidly.

The second major change is a declining birth rate. We have the lowest fertility rate in our history -- 1.5 children per woman whereas 2.1 children per woman is required to maintain a stable population. As a result, in time, there will not be a large enough work force to support our aging population.

The third demographic factor is the aging of the population born between 1946 and 1966 -- the baby boomers. In each of those years, there were 400,000 births. By the year 2,000 most of the baby boomers will be in their mid to late forties.

The baby boomers have affected each phase of our lives. In the early stages, they placed a tremendous burden on the educational system, and as they entered the work force, unemployment rates soared. In the 1970's, the labour force grew by 30% compared to only 11% in the 1950's, and 18% in the 1960's. The aging of the baby boomers will have great impact, socially, economically, and politically on our retirement. There is likely to be a conflict between expanded needs of an aging population and a deterioration of the services which the government has been promising. Things that we and our parents are taking for granted; housing, health care, pensions, guaranteed income, and other social programs will be difficult if not impossible to maintain at the current level.

In Canada, there are now about 16 retirees for every 100 people in the workforce. When the last of the baby boomers retires, there will be about 34 retired people for every 100 people working -- and this does not take into account increased life expectancies. Add to this the fact that government expenditures for the elderly are approximately three times per capita, as that for a person under age 65, and you can quickly recognize the potential problem.

Take for example the Canada Pension Plan. As "long ago" as 1986, Canada's chief actuary proclaimed the C.P.P. to be underfunded by more than $230 billion. Even with the increased contribution rates, the fund is underfunded and the amount by which it is, continues to get larger. Premiums paid today are only used to pay today's retirees.

Politics, Government and the Future

All of these changes are being noticed by our politicians, who are quickly realizing the seriousness of the situation. Until very recently governments were promising us a worryfree retirement, pensions, protection against inflation, guaranteed incomes, free healthcare, and retirement housing. Now, they are realizing that at current debt levels of $35,000 for each working Canadian (increasing at $330.00 per month), we will simply not be able to afford the retirement our parents are currently enjoying -- no matter what our expectations.

The federal government has already abandoned its program of universality by taxing back Old Age Security over $50,000. (It is interesting to note that even though most government benefit programs are indexed, the $50,000 level regarding O.A.S. is not. Therefore, many employees retiring ten years from now, will have all of their O.A.S. taxed back.)

In many provinces, additional taxes are being levied against employers to beef up provincial health care systems.

Governments are now beginning to realize they cannot fund the increases in the cost of living for one-quarter of the population. Many provincial governments are presently introducing legislation that will ultimately bring about indexation of private corporate pension plans. Also, there is the question of mandatory retirement. In some provinces, (Manitoba, New Brunswick, and Quebec), mandatory retirement is outlawed. The Supreme Court of Canada is deliberating the abolition of mandatory retirement at age 65. Should this occur, employees will have the right to decide when to retire.

In other words, governments are shifting the onus of responsibility for future generations of retirees to the corporate sector, and to the individual.

The Corporate Response

It is not surprising that many companies are viewing their newly found responsibility with some scepticism. In anticipation of changing pension legislation, companies are changing their pension plans from defined benefit plans to defined contribution plans. Group RRSP's are now becoming very popular. Companies, in fact, are beginning to put the responsibility for retirement on the shoulders of the employees.

The Employee and the Future

Although a great many changes are beginning to affect employees, most continue to believe that someone will take care of them in retirement -- the government, the company, or the union.

While most will want to retire, few are prepared for retirement. Very few employees understand RRSP's, annuities, or Registered Retirement Income Funds (RRIFs), yet they will have to make decisions about these -- decisions that will affect them for the rest of their lives.

We are moving from a linear life cycle where school, work and retirement were the norm to a cyclical life plan where school, and work, may be followed by a second career, or by more education and where leisure is interspersed during the entire life cycle.

The Retirement Planning Process

It is fair to suggest that many employees meet a variety of needs through the company. Some depend on the organization only financially, while others meet security, social and ego needs through their place of work.

It is important for a corporation to assist its employees in creating a structure that will replace the company when it is no longer there. If this does not happen, the chances are that companies will be facing future generations of retirees on their doorsteps.

A retirement planning program must, first of all, raise awareness. It must ensure that employees recognize that they are responsible for the rest of their lives, and the onus for their future is with themselves.

Secondly, the program must impart information that not only deals with one part of a person's life, but in fact, takes into consideration the person as a whole. It must deal with all the needs -- financial, emotional, social, and psychological.

Thirdly, the program should be objective. It cannot tell people what to do, rather it should allow people objective and viable options so they can determine their own future.

Finally, a retirement planning program should be continuous. It should allow individuals to continuously think about their options.

For example, employees who are 35 to 40 should be introduced to financial planning. At age 45 to 50, topics should include financial planning, estate planning, health and housing options. Between ages 50 to 60, employees should be covering all of the above topics plus the psychological implications of retirement -- Who am I if I don't work? What will I do with my time? How will I get along with my spouse? etc. All of these become important at different stages in a person's working career.

Typically, a company should start a retirement program with those employees who are closest to retirement, say within 5 years of retirement, and then work back to age 35 or 40.

Studies have shown that older employees who have received the benefits of a Retirement Planning program have a better, more positive, attitude towards their work. They realize the Company does care.

Many companies will use their retired employees as a future labour force. Consequently, the way employees are treated prior to retirement will determine their attitude towards working for the employer after retirement.

If mandatory retirement is indeed done away with, a retirement planning program will provide a safe mechanism and comfort zone for both the company and employees when planning the timing of retirements.

Corporations will find that what they do for their employees in retirement planning now, will have a great impact on their own future.

Jury Kopach is President of Murray Axmith Retirement Services Inc., which is solely devoted to providing retirement planning seminars to employees on behalf of employers.

As a Retirement Planning specialist he has developed programs dealing with all major issues of retirement including financial planning, psychological adjustment, health maintenance, self-development as well as estate planning, housing, and relationships.

He is the Editor of "The Retirement Letter", a newsletter which updates current and retired employees on important issues affecting their retirement plans.
COPYRIGHT 1990 Canadian Institute of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Kopach, Jury
Publication:Canadian Manager
Date:Sep 22, 1990
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