If you're one of those Canadians who is banking on your employer pension plan to carry you through your retirement years, you may be in for a rude awakening.
That's the word from renowned Canadian investment author Gordon Pape.
When Pape talks about the retirement time bomb, he's not just pitching his latest book - The Retirement Time Bomb: Achieving Financial Independence in a Changing World. He's pitching the reality of a serious pension shortfall in Canada that could lead to financial crisis for retirees - and perhaps even a social crisis.
So what is the retirement time bomb, as Pape views it?
 |
| Gordon Pape advises caution in investing in income trusts. |
It's the critical shortfall in pension plan funding in which the majority of Canadian employer pension plans are underfunded. And that pension plan shortfall can only worsen as the percentage of retirees in the population increases at a dramatic rate in the next few years.
"We're seeing the leading edge of the Baby Boomers turn 60 this year, which is quite a shock when you stop and think about it," says Pape, who has addressed his concerns in an open letter to Prime Minister Stephen Harper.
"That, of course, is the tip of the iceberg. The Office of the Superintendent of Financial Institutions (the primary regulator of financial institutions and private pension plans in Canada) reports that something in the order of 72 per cent of the plans under its jurisdiction are in a deficit position and the total amount of money in the shortfall is many millions of dollars."
Other numbers suggest that the situation is replicated in pension plans under provincial jurisdictions as well, he adds. "So it's a time bomb. And one of the things that concerns me is that the issue wasn't raised at all in the federal election campaign."
Exacerbating the issue is the fact that many investors had their nesteggs shattered in the nasty bear market of 2000-2002.
Pape addresses these issues and provides advice to Canadians on how to avoid a financial crisis in their retirement years in The Retirement Time Bomb, published by Penguin Books.
The bottom line, emphasizes Pape, is that people have to take charge of their financial planning. "If we don't do something about it ourselves, it's going to be pretty serious," says Pape. "My advice to people is don't operate on the assumption that your pension plan is going to be there, take more initiative to increase your personal savings, use RSPs (retirement savings plans) to the extent of the room available and get rid of debt."
Pape also encourages people to take a more active interest in their employer pension plans, saying they are often ignored or taken for granted.
"I think we have to be more proactive in demanding information on what's going on," he says. "People need to really take a close look at their plans, how they're doing and ask some hard questions. If the plan is in financial trouble, they need to start putting pressure on the company and the plan administrators ... to get the pension plan back onside."
As the author of 40 books, most of them on personal finance, Pape should be a role model for Canadians planning their retirement. Although the former newspaper reporter and magazine publisher didn't become a serious investor until he was in his late forties, the 69-year-old has done a pretty decent job of building his own wealth. He does this interview from his $1.5-million US winter home in Florida.
"I'm about to turn 70, so my investing style is very conservative and income oriented," says Pape, who publishes four electronic investment newsletters,including the Internet Wealth Builder. "As I become older, I've moved more of my assets out of growth securities and into more conservative securities. I started buying income trusts back in about 1998-99 and, of course, I've done very well because I bought them when they were cheap.
"I've never had any monstrous years (in investment returns) because I wasn't very big in the tech bubble. I've had years of 20 per cent and years of 30 per cent (returns). The more important thing is that during the bear market, I didn't lose a lot of money because my portfolio was well balanced at the time."
Pape singles out mutual fund legend Peter Lynch, the former manager of Fidelity funds, as his favourite investing role model.
"I'm a big fan of value investing so certainly I like (Berkshire Hathaway chairman) Warren Buffett, but in terms of investment success and communication skills, I think my favourite would be Peter Lynch."
Pape urges investors to make their investments a priority before it's too late.
"People wait too long to really sit down and assess how much money they're going to have available to them in retirement," he says. "Of course, the problem with that is that if you're going to discover at age 60 that you're not going to have enough income at age 65 to sustain your standard of living, it's too late to do much about it."
Procrastination is a major problem when it comes to finances, he adds. "Another problem is that our savings rate is too low. Consumerism is rampant and continues to be rampant. I think people need more balance between their consumerism tendencies and their saving for retirement."
Pape also believes many investors generally have too much exposure to the stock market. "The very clear impression I get from e-mails from my subscribers is that people are overweighted in the stock market, and there's no doubt that some of these people took pretty heavy losses during the bear market."
"I generally recommend that if you're retired, you probably shouldn't have more than 25 per cent of your assets in equities. The rest should be in some type of income generating security - fixed income such as bonds and variable income with things such as income trusts. And the equity sector of the portfolio should be invested in good solid blue-chip dividend paying stocks."
These are certainly not guaranteed, he notes, but are less prone to take a heavy hit in a bear market and at the same time can generate dividends for income.
Pape is a fan of the popular income trusts that pay monthly cash distributions to unitholders, but advises caution in selecting those investments.
"One of the things I suggest to people is that they don't go rushing off and buying these small-cap income trusts on their initial public offerings," he says. "We've seen a few of them crash and burn."
If you want to reduce risk, you should stick with the well-established income trusts that have a steady record of increasing their cash distributions, he adds. "I would also like to see better and more uniform reporting standards for the income trusts. I think there's a critical gap in the uniformity of the financial statements of income trusts, which makes it difficult for people to get a handle on just how sound the trusts and their distributions are."
If The Retirement Time Bomb is his last financial book, Pape believes he's going out with style.
"The whole issue of retirement and retirement planning has always been very important to me," he says. "I guess what's special about this book is that it might be my last financial book, although I don't think Penguin would like to hear that.
"I also think a book like this can do more to really make a difference in people's lives and attitudes than many of the other books I've written."
"There's nothing that makes me feel better," he adds, "than when I hear from people who say I've been able to make a difference in their lives."
* SAGE WORDS: "Millions of Canadians will be reaching retirement age over the next two decades. Unless meaningful action is taken now, many of them may face serious financial hardship, resulting in tremendous pressure on our social services."
- Gordon Pape, in an open letter to Prime Minister Stephen Harper.
Web Watch: www.gordonpape.ca
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
