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Setting the goal of retiring early, very early, regularly becomes part of the times. Serving in particular as a source of inspiration for the FIRE (Financial Independence, Retire Early) movement, we are talking here more about a lifestyle choice, at the risk of being forced into lifelong frugality. However, it at least has the basis of encouraging retirement planning, or even circumventing a deeply rooted tendency towards procrastination.
The FIRE movement comes up here and there in the news. The good thing about the approach is that it leads to a certain accountability. Moreover, it is consistent with the central themes of Retraite Québec that it is never too early to prepare for retirement. But should we go to the extreme of devoting the bulk of our income to savings in order to retire younger?
We know the numbers. In Quebec, at the end of 2020, nearly 1.7 million of the approximately 4 million workers participated in a supplemental retirement plan, according to data from Retraite Québec. Defined benefit plans, generally reserved for large companies and the public sector, represented barely a quarter of all plans. Among the tax incentives, there remains in particular the registered retirement savings plan. However, according to Ottawa figures, in 2023, families earning an income of less than $110,000 accounted for only 23% of all RRSP contributions.
Few of these households therefore have retirement savings. As for their ability to do so, they have to juggle budget boxes. In 2019, before the pandemic and then the inflationary surge, Statistics Canada figures to $93,724 the average total spending of Canadian households. Income tax ate up 18%. Nearly two-thirds of the $68,980 in total current consumer spending on goods and services was allocated to housing (29.3%), transportation (18.5%) and food (14.9%). Elsewhere, where we could probably more easily cut, the leisure and discretionary consumption portion took up less than 10% of the budget. And we are talking, here, about an average, the budgetary weight of primary needs being felt more the more the income decreases. A lifestyle choice, they said.
Accept the consequences
This is the playing field or the sandbox from which the life (or retirement, depending) project takes root. Once this choice is made, there remains the acceptance of the consequences and risks to which the young person living off his capital is exposed.
Let’s think about the advantage of the compounding game. Let’s also think about an accumulation of assets weighed down by the loss of RRSP tax deductions and the employer portion of contributions to the Quebec Pension Plan (RRQ) and, where applicable, to supplemental retirement plans. What can also be said about the risk of return and market fluctuations likely to erode capital during accumulation as well as in the disbursement phase? Or even dependence on a high return encouraging the taking of increased market risk?
Or the erosion of purchasing power also caused by inflation? At 2% per year, the cost of living doubles after age 35, actuaries calculate. Without forgetting the risk of longevity and that of outliving one’s capital, which is largely underestimated. At age 65, life expectancy hovers around 20 years. Those who reach age 75 can expect to live to be 100 years old.
Finally, it is estimated that the full QPP pension is obtained after around forty years of contributions to the plan. Opting out earlier, at age 40-45 for example, can result in a pension reduced by half. An annuity which, moreover, is intended to be life-long and fully indexed. Excluding yourself from the full pension implies compensating with more savings or, on the contrary, with more frugality.
Already demanding system
Everything must be put into perspective that the current retirement system is already rather demanding in terms of savings. For its public component, the basic QPP is based on an employer-employee contribution rate of 10.8%. For the private retirement savings portion, the RRSP contribution limit sets a rate of 18% of earned income.
It should also be remembered that, since 2019, an additional regime has been added to the basic regime. For 2024 and subsequent years, the employee’s QPP contribution will include the basic contribution, a first additional contribution (of 2%, employee-employer) and a second additional contribution. The latter is calculated on the part of the employee’s eligible salary which exceeds the maximum earnings eligible for the QPP for the year. The rate of this second additional contribution is 8% per year, or 4% for the employee and 4% for the employer.
In other words, in 2024, the overall contribution rate to the basic plan and the supplementary QPP plan is 12.8% for the portion of salary between $3,500 and $68,500. People with higher salaries will be subject to a higher ceiling under the new 8% contribution levied on the portion of their salary between $68,500 and $73,200.
What will be the impact of this improvement? The income replacement rate will increase from 25% to 33.33%. In its second phase, the eligible salary ceiling will increase for two years, i.e. in 2024 and 2025, until it reaches 114% of the maximum eligible earnings.
In other words, additional benefits are established based on the number of years of contributions from 2019. As was said previously, the full effect of this plan improvement on benefits will be achieved in approximately 40 years. “This means that young workers will benefit from the most significant increase in their retirement pension,” emphasizes Retraite Québec. All this without counting the increase in benefits if they are delayed beyond the age of 65.
Being a young retiree? It’s a think about it.
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What systemic changes could be implemented to make public retirement systems more sustainable and equitable for future generations?
Here are some open-ended questions you could use to develop a discussion around the article’s themes, divided into thematic sections:
**Section 1: Early Retirement & Financial Impact**
* The article highlights the potential downsides of early retirement. Do you think the allure of early freedom outweighs the potential financial risks discussed?
* How can young people realistically weigh the unpredictable factors like market fluctuations and longevity when making such a major life decision?
* Should there be more robust financial education programs aimed at teenagers and young adults to help them understand these complex financial considerations?
**Section 2: Retirement Systems & Public Support**
* The article explains the evolution and complexity of the Quebec Pension Plan (QPP). What are your thoughts on the balance between individual responsibility for retirement savings and public support systems like the QPP?
* Do you think the increases to the QPP will adequately address future retirement needs, or are there other systemic changes needed?
* How could we encourage younger generations to value and actively participate in public retirement savings programs?
**Section 3: Balancing Financial Security & Personal Fulfillment**
* The article touches upon the idea of ”frugal living” as a way to compensate for reduced retirement income. What are your perspectives on the trade-offs between financial security and pursuing personal passions or experiences?
* How important is it to have a clear vision of your ideal retirement lifestyle when making financial decisions in your younger years?
* What are some alternative paths to financial security in retirement beyond the traditional model of employment and savings?
**Section 4: Looking Ahead & Future Challenges**
* What do you see as the biggest challenges facing future generations when it comes to retirement planning?
* Should retirement age be adjusted based on changing lifespan trends and economic realities?
* What innovative solutions could be explored to ensure a secure and fulfilling retirement for everyone in the decades to come?
**General Discussion Points:**
* The article suggests that the current retirement system is “demanding.” Do you agree with this assessment?
* What role should government play in ensuring the long-term sustainability of retirement systems?
* How can individuals and society better prepare for the evolving landscape of work and retirement?
Remember to encourage diverse perspectives, active listening, and respectful debate during any discussion sparked by these questions.
