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Depending on the country you live in, an individual’s need to save for retirement can vary widely. For example, in Norway (where I currently reside) they have a very socialist economy and any resident will retire with a pretty substantial income for their entire lives. In Canada, my home country, we have the Canadian Pension Plan. This pension plan is not huge – in 2007 the average monthly benefit was $481.46. This has huge implications on how I run my family finances.[ad#tdg-embedded]
If I were to live in Norway, then saving for retirement would not need to take a huge chunk of my disposable income. The government is going to ensure that I can afford to live a comfortable existence, with perhaps even a bit left over. On the flip side, in Canada I cannot rely solely on the CPP benefit. $481.46 will not be enough for my wife and I to live on (at least not with what we have become accustomed too), especially with the type of retirement I want! As a result, I need to allocate a large portion of my income to my investment portfolio to ensure that I supplement that CPP benefit.
In essence, I am forced to invest my money for retirement. The government is making me do it. This is exactly as I want it! I do not want to start a debate about the pros and cons of socialist governments, or the associated taxes. However, that is really what we are talking about here. The Norway pension plan requires a large tax burden on its citizens. Canada’s does too, but not to the same extent. I do not want to rely on a government for my future well-being.
The point I am trying to make here (although not very eloquently), is that one of the factors that impacts an investor is the government in their home country. Depending on the pension plan you will receive, more or less of your disposable income must go towards saving for future income. In addition, government rules on the taxation of investment assets must be factored into many of your investment decisions.
In summary, I am suggesting that as individual investors you consider the impact of your local government on the investment decisions you are making. Investing is not complicated but many things must be given some think-time. The government is certainly one of them.
I agree. Perhaps it’s one of the downsides of today’s global financial blog network that we read posts from other countries that may address very different financial and political realities (particularly the case with Britain, where I reside, versus the US, where most of the financial bloggers hail from).
On the other hand I do feel some of my posts (most?) have a global appeal – perhaps not the individual share picks, but certainly the motivational ones.
To return to the subject at hand, as I say I agree it’s better to be responsible for yourself. The trouble is even if you back away from the Government caring for you, it can still change the rules.
For example, a few years ago the UK government changed the rules on ISAs (UK tax exempt savings accounts) to reclaim a tax credit on dividends that’s estimated to be costing UK investors in ISAs £5 billion a year.
Also, if you save for a rich retirement but nobody else does, you can guarantee some future populist Government will tax you. The danger of going against the grain…
Ultimately we’re all citizens of a country, for good or ill.
Keep in mind in Canada the CPP and OAS work together, the OAS being for everyone, and the CPP for people who have earned income in their lifetime. (and there is a GIS for people who are stuck with very little income)
The average payment rate for CPP may be $481.46, but also you would receive OAS which has an average payment of $489.54 for a total of $971 per month or 11652 per year per person. If you had two people and a paid for modest home you can easily live on that. The government provides for a minimum standard of living, and if you want more than this you need to provide it for yourself. These are also adjusted by the CPI each year. You are also able to earn lots of income before these benefits are reduced (except the GIS, which is more like a social assistance for the retired).
I believe that this system works very well (seeing my father prepare for retirement next year, with little to no savings). Though, I’m planning ahead to be able to support myself in retirement so that I don’t have to worry about what government benefits are available, they will just be an added bonus and planned around as I approach my own retirement. Hopefully life treats me well.
Good point on the combination of the two benefits. There is pretty good clawback on the OAS depending on your income though is there not?
Also, while the average CPP is 481, that includes a lot of people who didn’t work for a full career. If you do work around 35 years (not sure exact number) the combined benefit of CPP + OAS is about 17K (908 for CPP + 516 for OAS monthly), and that’ll be inflation-adjusted. It’s a very solid base to work with.
It’s not just the level of benefits. The Government of Canada has gone out of its way to encourage Canadians to save with tax breaks.
I have always considered Canada’s safety nets in terms of retirement to be much better than the US, but I guess that’s not always the case. I read somewhere that the average social security benefits are almost $1200 in the US, which is higher than in Canada.
I don’t mind that the government can ‘default’ us into a retirement plan or now into a 401(k) plan at work, but I’d like to see some more options to get better rates of returns.
It’s always interesting to read just how different governments deal with issues of retirement and social safety nets. Being an American, and with most of the personal finance bloggers around also being Americans, you can sometimes get a rather insular view of personal finance. Certainly, knowing what your government will provide in terms of retirement is a vital part of planning your own retirement, and one that varies depending on where you are currently residing.