Is Your Retirement at Risk?

Sadly, this is the question many people are asking themselves nowadays. With governments running higher and higher deficits, one has to wonder how all of this debt going to be paid off? It’s especially concerning when they consider our pension funds to be “government assets”. Would it surprise you to find out that not only have these government-run pension funds been completely mismanaged, but also that perhaps the government had also been dipping into the cookie jar from time to time?

I don’t think this would come as a shock to any of us. For the time being, we are being assured that our pensions are completely safe, there’s no malfeasance going on whatsoever, and that we will be well taken care of in our old age.

In the US, Nikki Hailey recently made headlines by asserting that the retirement age should be increased for future generations (heads up, Gen Z!), based on “longer life expectancy” and the current unsustainability of the program. She claimed this would not affect anyone currently collecting benefits or close to retirement.

But really, who knows? The rules of the game can change at any time. So, whether you are 25, 45, or 65, it’s time to start looking out for yourself. In this article, we are going to delve into some of the issues with our government-mandated pensions, and some additional strategies you may want to consider to help fund your golden years.

Where are we now?

Let’s begin by discussing where things are at with Canadian and American pension plans right now.

Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) is a mandated savings plan for all working Canadians. Contributions for employees are 5.95% of their yearly maximum pensionable earnings ($68,500 for 2024), while their employer matches their contributions. Self-employed people pay both the employee and employer contributions, for a total of 11.9% annually. The official retirement age for Canadians is 65.

But, wait, there’s more! Canada has just introduced CPP2, which opens up another bracket of earnings from $68,500 to $73,200 for them to tax, to the tune of 4% annually.

While you can start pulling from your CPP at as early as age 60, you will maximize your monthly payments if you delay until you are 70. Based on the monthly maximum CPP benefit, you would receive:

• $873.34/month if you start collecting at age 60
• $1,364.60/month if you start collecting at age 65
• $1,937.73/month if you start collecting at age 70

The average amount paid for a new retirement pension at age 65 as of October 2023, however, was only $758.32. Not exactly the most lucrative forced savings plan, would you agree?

US Social Security

Similarly to the CPP, the US Social Security program requires automatic payroll deductions. Employers and employees each pay in 6.2% of maximum earnings ($168,600 for 2024) and self-employed people pay the entire 12.4%. The official retirement age for Americans is 67.

As of September 2023, the average monthly benefit for US Social Security recipients was $1,841. Delaying your benefit until age 70 will significantly increase your payments. Based on the monthly maximum US Social Security benefit, you would receive:

• $2,710/month if you start collecting at age 62
• $3,822/month if you start collecting at age 67
• $4,873/month if you start collecting at age 70

The average monthly pension amount as of September 2023, however, was only $1,841. Just as we saw with the CPP, the average American is not receiving close to the maximum social security benefit.

Does what you pay equal to what you get?

In theory, supposedly the answer is yes. In reality, it’s harder to say. It depends on how much you have contributed over the course of your life and, of course, how long you live.

One Canadian man did some calculations here demonstrating that a young person contributing the maximum every year would in no way come close to receiving back what they have paid in upon retirement. Essentially, his point is that younger people are paying into the system to prop it up, with little hope of getting out what they put in.

According to the CDC, the average life expectancy for Americans in 2021 was 76.4, or 73.5 for males and 79.3 for females. And life expectancy is actually declining at this point.

Now, you tell me, given the actual current downward trend of life expectancy, do you think you are going to get everything out of your pension that you paid in? Or do you think you will be leaving some money on the table? If an American man retires at 67 years old and the average life expectancy is 73.5, he has only 6.5 years to receive his pension benefit. When you put it like that, increasing the retirement age sounds absolutely criminal.

And are the monthly benefits enough for you to leave a full life on? Particularly in Canada, that is an obvious “no”.

With persistent inflation increasing the cost of living and an incompetent government managing your pension investments, I’d say it’s probably a good idea to have some other strategies on the go to make sure you can retire comfortably.

Alternative Strategies to Fund Your Retirement Goals

I suspect that most of our readers have multiple retirement investment strategies in place already, but I wanted to touch on a few alternative strategies in this article anyway. Perhaps you will find something new you can add into your overall plan to increase your diversification and further grow your nest egg.

Registered funds

This isn’t exactly an “alternative” strategy in the sense that it’s unique, but it is another tool in your toolbelt when it comes to funding your retirement. Leverage your savings accounts strategically to take advantage of tax incentives and grow your wealth.

Employer pension plan

Many workplaces have some form of savings plan as part of their overall compensation package. Make sure you leverage this as another way to save for your retirement.

Annuities

Admittedly, I was not familiar with annuities until I started researching for this article and saw them coming up a lot. Per Investopedia: “The term “annuity” refers to an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future. Annuities are mainly used for retirement purposes and help individuals address the risk of outliving their savings.”

Whole life insurance

With whole life insurance, you build up a cash value savings account with tax benefits. You can front-load your plan in your earlier years to grow the cash value, and then withdraw or borrow against those funds as part of your retirement plan. This differs from term life insurance policies in that you can benefit from the policy while you are alive, while also receiving a guaranteed benefit upon your death.

Dividend-paying stocks

Dividend-paying stocks are a great way to set yourself up with some passive income as you age. Take your tax situation into account when you are looking at what stocks to invest in and the best way to hold them between registered and non-registered accounts.

Hard assets

Hard assets, such as real estate and teak, are great ways to diversify your investments, build equity, and earn income. Quoting myself from last week’s article: “That real estate may serve as your Plan B landing pad and, in the meantime, can earn you some income as a rental. Teak is a long-term play that pays off handsomely in the future, an ideal way to steward your wealth to future generations and build your own retirement fund.”

While you can invest in both agriculture and real estate in the US and Canada, we love a good offshore investment for the ultimate in diversification. Hit up our friends at ECI Development for more information on how you can invest in hard assets overseas.

Invest in a small business

The formula is pretty simple: invest in a small business, pay someone to handle the day-to-day operations, and use some of the remaining profit to (partially) fund your retirement. I wrote an article about the great opportunity that exists within small businesses for funding your retirement and Plan B dreams, and this article from Ownr also does a great job at breaking it down. If you have an entrepreneurial spirit, this could be a viable option for you to consider.

Move to a lower-cost destination

Did I save the best for last? Perhaps! A great way to stretch those retirement dollars further, especially if you are living off your pension alone, is to move to a country with a lower cost of living. We talk about this all the time here at Escape Artist and I know many people who have done this. Countries such as Mexico, Nicaragua, and Panama are just a few of the places you can go to enjoy a lower cost of living. Panama, in particular, has some spectacular benefits for retirees, including:

• One-time Duty tax exemption for household goods up to a total of $10,000;
• Duty exemption for importing a new car every two years;
• 50% off entertainment anywhere in the country (movies, concerts, sports);
• 30% off bus, boat, and train fares;
• 25% off airline tickets;
• 50% off hotel stays from Monday through Thursday;
• 30% off hotel stays from Friday through Sunday
• 25% off at restaurants;
• 15% off at fast-food restaurants;
• 15% off hospital bills (if no insurance applies);
• 10% off prescription medicines;
• 20% off medical consultations;
• 15% off dental and eye exams;
• 20% off professional and technical services;
• 50% reduction in closing costs for home loans;
• 25% discounts on utility bills;
• 15% off loans made in your name;
• 1% less on home mortgages for homes used for a personal residence

Does your government give you these kinds of discounts? I don’t think so. And pensionado visas in these Latin American countries are usually very attainable for North Americans. Here are a few popular destinations and their corresponding monthly income requirements (from guaranteed sources, such as your pension, in USD):

• Nicaragua = $650/month
• Panama = $1,000/month
• Costa Rica = $1,000/month
• Portugal = approx. $892/month

Would you be willing to make the move in order to maximize your pension benefits? It’s definitely something worth considering as part of your overall retirement plan.

Ultimately, it’s up to you

When it comes to saving for retirement, ultimately, it’s going to be up to you. Hopefully our government pensions will be there for all of us but, regardless of how it all shakes out, you don’t want to rely on them as your one and only strategy for funding your retirement.

Consider integrating some of the strategies above into your retirement planning to ensure you will have income from multiple sources. And always remember to discuss with your accountant or financial planner to make sure you don’t get on the tax man’s bad side. Diversify, save, and invest correctly and you will set yourself up for success. Think of your pension not as the sundae itself, but as the cherry on top!

I hope you enjoyed this week’s article! Subscribe to Escape Artist Insiders magazine for all the most up to date advice straight from our offshore experts. This month’s issue is all about the fabulous retirement destination Costa Rica and you won’t want to miss it. Get your copy today!

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Lisa is an aspiring expat from Canada who is working to put together her Plan B with a young family in tow. She is excited to pair her lifelong love of writing with her passion for offshore strategies and outside-the box investments in her weekly articles for Escape Artist readers. Follow this “rebel with a cause” as she walks the path less traveled and shares her experiences along the way.

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