The struggle to stay afloat
An affluent couple relaxing aboard a 36-foot yacht, tapping a golf ball onto a velvety green or sipping champagne on the deck of a cruise ship: the financial planning industry loves using these images to depict newly minted retirees. The message is clear: after navigating life’s turbulent seas, this couple has charted their personal and financial course wisely and is ready to sail off into the untroubled waters of retirement living.
Unfortunately, many people just aren’t in the same boat. Storms, in the shape of financial disasters, tempestuous personal life upheavals or serious health setbacks, do happen. And often they cause great damage, throwing even the best-laid retirement plans off course. So what do we do when these clouds gather just as we’re set to retire?
Heather Pernell and Rosemary Calloway have weathered such storms. (Their names have been changed to protect their privacy.) The hardships they encountered just as they were set to retire means neither will be spending retirement in luxurious bliss. In fact, simply keeping their heads above water is their immediate goal.
Pernell, now 68 and living in a Calgary suburb, was looking forward to enjoying fairly prosperous retirement. She’d worked for more than 30 years with the same company in the agricultural industry, ending up as the CEO’s secretary. Upon retiring from this job, she managed the local credit union and, when that ended, helped run her husband’s small business. The couple had done everything right, and both were just set to enjoy their well-deserved retirement.
But those expectations soon disintegrated. “Things would have been fine if everything had gone as planned,” laments Pernell. “We owned a house. And with my pension and my husband’s, we would have lived quite comfortably.”
Pension income cut in half
The first bad break came when Pernell’s marriage suddenly fell apart, ending in separation in January 2002. After the split, the couple sold the house, and Pernell was forced to move into an apartment. Realizing her financial outlook was no longer rock solid, she put her share of the sale of the house into a savings account and didn’t dare touch it. Then in January 2003 came more bad news. Because of poor market returns, her pension fund from the dairy company had run short of capital. That meant her monthly pension income, which she had been counting on so heavily, would be cut in half.
The pension blow was severe. “I’d always thought my pension would be there so I’d never had any RRSPs or [other] investments,” Pernell says. “Now, all of a sudden, my expected income is not only cut in half but may even eventually disappear altogether.” She recently learned that what’s left in the fund will be put into an annuity for plan members.
Pernell’s situation is frighteningly common. She’s just one of many Canadians who recently have been victimized by underfunded pension plans. They’ve contributed to pension plans believing this money will be there at retirement. But now, many plans have much less than expected, and some may not be able to meet their pension obligations at all.
The separation and the pension hit have left Pernell in reduced circumstances, living off a mix of Canada Pension Plan (CPP) benefits, Old Age Security (OAS) benefits and the now-depleted company pension payouts. These total $17,500 a year, along with almost $40,000 in her savings account (the proceeds from the sale of the house) that she’ll only use in an emergency. From this, her major financial obligations are the expenses on her apartment, which add up to $9,000 a year (rent, utilities, insurance) and her car, which eats up another $2,000. That doesn’t leave much for her to pay the rest of the necessities such as groceries and medical, let alone clothing and entertainment.
“My main financial goals right now are surviving and staying out of debt,” she says. “I just want to hang on to what I have – my apartment and car. I don’t think I’ll be taking an extended holiday anytime soon.”
Pernell says that adapting to her new reality has been difficult, but she’s coping. “I don’t jump in the car and visit friends any time I want to. Gas is too expensive. I’m paying much closer attention to expenses, not buying new outfits or spending as much on entertainment. I was raised frugally, and that’s helped me adjust.”
Retirement savings not a priority
Rolling with life’s punches is a skill that’s also come in handy for 65-year-old Rosemary Calloway. Now living in a small town in northern Ontario, this twice-divorced mother of four (plus two stepchildren) didn’t dream of an opulent retirement but believed she’d always have enough. That’s why when her second marriage ended in 1986, she decided against putting the proceeds from the sale of the house into retirement savings. She didn’t feel the need to adjust her lifestyle or sacrifice her standard of living to her new circumstances. So, she went through those savings rapidly but without regret – she had a good time doing it.
Because Calloway had worked in some job or other since she was 13, she never really saw the need to save. Work was something she felt capable of doing indefinitely. Although she’d held a wide array of jobs – assistant manager of a department store, bank teller and, most recently, working the midnight shift at a 24-hour convenience store – she had never earned a large salary nor stayed long enough to qualify for a company pension. And Calloway had always been the type to spend what she earned, not frivolously (she doesn’t drink, smoke or gamble) but never sparing herself a vacation and always managing to run a car. So she continued this lifestyle, working part-time at the convenient store and applying for early CPP, happily getting by until her OAS benefits would kick in at 65.
But much like Pernell, fate got in the way. Her health failed her. In December 2002, Calloway underwent an emergency quadruple bypass operation. The surgery left an incision that was slow healing and made it impossible for her to return to her job. “When the illness struck, my life came crashing down,” she says. “I thought I could make it until I was 65 on my combined income from the CPP and my part-time job. But when I got sick, everything came to a standstill.”
Unable to work because of her illness, she received 15 weeks unemployment benefits, but those ended in April. And since her Old Age Security benefits would not start until the end of August (the month after her 65th birthday), she had to somehow find a way to scrape by for four months on a grand total of $389 a month. From this tiny sum, she had to pay the rent on her subsidized apartment ($400 a month), food, drugs and other expenses needed to sustain her.
Somehow, Calloway made it through those agonizing months. “It was certainly a stressful time. You don’t know how you’re going to make it from one month to the next. Maybe someone up there was looking after me,” she laughs.
But she quickly went through her small reserve of savings. “Before I got sick, I wasn’t planning for emergencies or putting money away for retirement,” she says. “When the sickness hit and I lost my job, I had no money to pay for drugs. I kept asking myself: ‘Why didn’t I start saving earlier?’” Luckily, she qualified for the Ontario government’s Trillium program, which subsidizes the cost of drugs for low-income residents.
Despite the paucity of funds, Calloway had built up one asset that can’t be reflected in any financial statement. She had a large network of people close to her who helped her get through the tough times. “Everyone should have such good friends and family,” she says. Family members stayed close and helped out with small things, giving her cable TV and a CAA membership as Christmas presents. The children also sent her grocery store certificates and sometimes filled her car with gas. She refused to ask for major financial assistance but gratefully accepted smaller gifts. “If I hadn’t had their help, I don’t know what I’d have done,” she says, her voice trailing off.
OAS makes the difference
In August, Calloway’s financial outlook became somewhat rosier when she began collecting OAS benefits, thus trebling her monthly income from just less than $400 to $1,200. Trying to make it through a year on $16,800 doesn’t exactly put her on easy street, but she’s nowhere near the financial distress she experienced early in the year. She’s very grateful to live in a subsidized apartment, which costs her $4,800 a year. Her car costs another $2,400, leaving her the task of stretching the rest to cover all other expenses.
Her financial goals are understandably simple: “I want to afford gas for my car to visit my kids or even put a little money away for a vacation.” Plus, she plans to keep up a small life insurance policy, worth about $4,000, which will be used to cover most of her burial expenses.
Both Pernell and Calloway have experienced bad runs of luck that dashed any plans of comfortable retirement. Yet you won’t find either of them wallowing in self-pity. Each one finds fulfilment in volunteer work: Pernell looks after elderly relatives who are suffering from early Alzheimer’s disease, and Calloway, when she gets better, plans on helping out those in hospital who have no one to look after them.
And both women maintain an amazingly resilient and positive attitude, despite the setbacks. “I’m adjusting,” says Pernell. “I’m very happy working in my garden and doing what I can for others. I’m a survivor. Always have been.” Calloway echoes those sentiments: “I’ve got loving children, good friends and I’m getting by on government pensions. Life is good.”
What the advisers say
The fact that they have modest resources doesn’t mean Heather Pernell and Rosemary Calloway should ignore their estate plans. In fact, their personal situations make it more important to put certain documents in place, says Jamie Golombek, vice-president, taxation and estate planning at AIM Trimark Investments in Toronto. Without valid and up-to-date wills, for example, their wishes for their remaining assets may be ignored when they die.
Also important is the possibility that, as for anyone, illness or incapacity could undermine their ability to control their affairs. “These are single women living by themselves,” says Golombek. “If they become incapacitated for some medical reason, if they’re in a hospital, who’s going to make financial decisions on their behalf?” A power of attorney for property names someone to make decisions pertaining to your worldly assets.
Similarly, mental incapacity could leave you unable to make decisions about what’s best for you in terms of health care. Without an advance directive, provincial rules may determine who makes such decisions on your behalf and “It may not be who you think it will be,” cautions Golombek. Known as a personal care directive, a health-care directive, a representative agreement for health care and various other names in different provinces, this document states your wishes and also names a decision maker for medical treatment.
Another area for Pernell to consider is the safety net she’s built. “Heather has an emergency fund of $36,000, which I agree she should keep as an emergency fund,” says Golombek. Meanwhile, Carol Funnell, a financial planner with Cartier Partners in Winnipeg, recommends Pernell pay off the $1,500 she’s borrowed on her line of credit; the interest rate she’s paying on her debt, says Funnell, is almost certainly higher than what she’s earning on her savings.
Consider investing reserve
Funnell also suggests Pernell consider investing her reserve to earn a higher rate of return. For example, “a balanced segregated fund [which holds a mix of stocks and fixed income investments] would carry a maturity guarantee on her principal investment while allowing more opportunity for growth.” While you pay more for segregated funds than for mutual funds that don’t have insurance features, says Funnell, the guarantee that she’ll get back her original investment plus any market growth after 10 years is especially important given Pernell’s financial situation.
Calloway has no such contingency fund but should look carefully at the life insurance policy she’s been paying $155 annually to keep in force and which she hopes will pay for her funeral, says Golombek. “If it’s a term life policy, it will expire and may not be worth spending that money,” he says. A whole life policy, on the other hand, will mature at her death and won’t terminate before she needs it.
At this stage, improving Calloway’s financial situation would be very difficult, says Funnell. “She’s a perfect example of why it’s so important to plan for the unexpected.”
Insurance coverage for critical illness and long-term care, had they been implemented before Rosemary took ill, would have gone a long way to ease the anxiety she’s experienced over the last year or so.
It’s an unfortunate reality that many retired Canadians are living on low incomes and with financial anxiety, according to Jamie Golombek. If there is a silver lining to their limited financial resources, it is that Pernell and Calloway have little debt to go along with their few assets. Says Golombek: “They are living within their means, and hopefully they’ll always have government support.”