Employers can do more for those fast approaching retirement
There have been numerous surveys lamenting the sad state of baby boomers when it comes to retirement.
Only one-half have saved more than $50,000 for their later years but 62 per cent aren’t worried about outliving their savings, according to Desjardins Financial Security.
Just one in three Canadians expecting to retire in 2030 are saving at levels required to meet basic household expenses in their retirement. Many might have to sharply increase their annual savings or continue working past 65 to avoid financial hardship, according to the Canadian Institute of Actuaries. And fewer than one-half of pre-retiree respondents know how much money they will need when they stop working, according to BMO Financial.
The scary statistics are not entirely surprising. It’s human nature for people to put off long-term decisions. Employees are known to devote more effort to planning for a two-week vacation than for their golden years.
Of course, for those born between 1946 and 1964, retirement is fast approaching if not already underway. And employers can help with the transition to life after work by boosting much-lacking awareness on the realities of retirement and offering tools and incentives.
A surprising number of plan members expect their employers to provide this kind of education, says Dean Connor, president of Sun Life Financial Canada in Toronto. Part of that expectation can be explained by the growing trend toward defined contribution (DC) plans.
“Employees are hearing loud and clear the message they’re now responsible for this, they’re not going to get a defined benefit that gives them 70 per cent of final earnings when they retire,” he says. “So they think, ‘Okay, I’ll do that, but you’ve got to help me here.’”
Helping people figure out how to prepare for retirement should be part of overall workforce planning, particularly with a tightening labour market and aging population, says Connor. And learning how to move from accumulation into decumulation is critical.
Much of the information directed at baby boomers has been about how to save, and now that this cohort is approaching retirement, their question is how do they turn that chunk of savings into predictable, lifetime income, he says.
With the move away from defined benefit (DB) plans, employees deserve to know more about financial risks and the long-term costs of health care, says Eric Filion, senior director of product development and marketing of savings for groups and business at Desjardins Financial Security in Montreal.
Employers have to educate workers about investment risk and ensure workers transitioning to retirement have what they need for retirement, he says.
“With DC plan conversion, they shift the risk to employees but they maintain the obligation to make sure employees have access to the information they require,” says Filion.
But there is a considerable mismatch between people’s expectations and reality. People think they’re going to be able to retire young and comfortably. But they don’t understand how expensive retirement is, how long they will likely live and how much money they need to save at four per cent interest to do all the things they expect to do, says Robert Brown, professor of actuarial science at the University of Waterloo in Waterloo, Ont., and co-author of the Canadian Institute of Actuaries paper Planning for Retirement: Are Canadians Saving Enough?
Taking a holistic view
People tend to think of retirement in terms of retirement income but that’s far too narrow a perspective, says Connor. Employees must think about health and health expenses and long-term care and critical illness, all the things that can happen in retirement, and ask whether they’re properly prepared.
It’s a matter of getting them to better understand the calculations and forecasts involved and the realities of market volatility, inflation, longer life expectancy and impending health risks.
For one, they should realize they can’t rely on the government for their well-being. Boomers with average working income beyond median levels could not maintain their standard of living on the Canada Pension Plan alone, and Old Age Security benefits can be clawed back once income reaches a certain level, writes economist Sherry Cooper in her book The New Retirement.
“Large nest eggs are required to cover the uncertainties of not knowing how long you will live (longevity risk), how large financial asset returns and inflation will be (income risk) or how much money you might need for unexpected but necessary expenditures (contingency risk),” she says.
When asked, most employees will underestimate their life expectancy, says Filion. With a 65-year-old couple today, there is a 30-per-cent chance one of them will live to 95, so if they retire at 55 or 60 they have to plan for 35 to 40 years without a new source of revenue.
According to the CPP, a 65-year-old female has a life expectancy of 22 years while a male has 19.3 years (contrasted with 1961 when a 65-year-old female had 16.1 years and a male 13.5 years).
Incentives and tools
To help, employers can provide incentives and tools such as matching contributions for pension plans or registered savings plans, or auto-enrolment in such plans. These tools can lead to significant rises in contributions.
“People are happy that someone takes charge but they can still opt out of these solutions,” says Filion.
Phased retirement or delayed retirement could not only help with the pending labour shortage for skilled workers but also help employees save longer for retirement.
“If you want to match your material lifestyle expectations, one way to make it happen is to retire later because it’s a double whammy — you can contribute longer and you need the income for fewer years, and you earn interest for longer,” says Brown.
Employers can help shine some light on the questions through retirement planning sessions by providers, with trained advisors available. These sessions can also give employees an idea on what newer products and services are available to help them understand what they need for retirement. They might think of the different levels of needs — to cover the basics, to maintain their lifestyle, or to leave an inheritance behind, says Filion.
But employers face a few obstacles too when it comes to helping out employees, such as fears of liability and lawsuits. There’s certainly a debate as to where employer responsibilities stop, says Filion.
“If you give advice, you could be held responsible. If you don’t give advice, you could be held responsible also. I’m not sure the industry as a whole has an answer right now. But what must prevail are the needs of new and incoming retirees.”
However, any modelling tools put in front of employees have caveats and cautions built into the front end so employees don’t place an inordinate reliance on the outcome, says Connor.
“They’re more directional as opposed to hyper-precise projections,” he says.
But all the literature and tools and incentives in the world might not be enough.
“You can lead a horse to water, that doesn’t mean they will drink,” says Brown. “There’s pretty strong literature that says attempts to educate workers fall on infertile soil.”
Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit www.hrreporter.com/ccbr.
Only one-half have saved more than $50,000 for their later years but 62 per cent aren’t worried about outliving their savings, according to Desjardins Financial Security.
Just one in three Canadians expecting to retire in 2030 are saving at levels required to meet basic household expenses in their retirement. Many might have to sharply increase their annual savings or continue working past 65 to avoid financial hardship, according to the Canadian Institute of Actuaries. And fewer than one-half of pre-retiree respondents know how much money they will need when they stop working, according to BMO Financial.
The scary statistics are not entirely surprising. It’s human nature for people to put off long-term decisions. Employees are known to devote more effort to planning for a two-week vacation than for their golden years.
Of course, for those born between 1946 and 1964, retirement is fast approaching if not already underway. And employers can help with the transition to life after work by boosting much-lacking awareness on the realities of retirement and offering tools and incentives.
A surprising number of plan members expect their employers to provide this kind of education, says Dean Connor, president of Sun Life Financial Canada in Toronto. Part of that expectation can be explained by the growing trend toward defined contribution (DC) plans.
“Employees are hearing loud and clear the message they’re now responsible for this, they’re not going to get a defined benefit that gives them 70 per cent of final earnings when they retire,” he says. “So they think, ‘Okay, I’ll do that, but you’ve got to help me here.’”
Helping people figure out how to prepare for retirement should be part of overall workforce planning, particularly with a tightening labour market and aging population, says Connor. And learning how to move from accumulation into decumulation is critical.
Much of the information directed at baby boomers has been about how to save, and now that this cohort is approaching retirement, their question is how do they turn that chunk of savings into predictable, lifetime income, he says.
With the move away from defined benefit (DB) plans, employees deserve to know more about financial risks and the long-term costs of health care, says Eric Filion, senior director of product development and marketing of savings for groups and business at Desjardins Financial Security in Montreal.
Employers have to educate workers about investment risk and ensure workers transitioning to retirement have what they need for retirement, he says.
“With DC plan conversion, they shift the risk to employees but they maintain the obligation to make sure employees have access to the information they require,” says Filion.
But there is a considerable mismatch between people’s expectations and reality. People think they’re going to be able to retire young and comfortably. But they don’t understand how expensive retirement is, how long they will likely live and how much money they need to save at four per cent interest to do all the things they expect to do, says Robert Brown, professor of actuarial science at the University of Waterloo in Waterloo, Ont., and co-author of the Canadian Institute of Actuaries paper Planning for Retirement: Are Canadians Saving Enough?
Taking a holistic view
People tend to think of retirement in terms of retirement income but that’s far too narrow a perspective, says Connor. Employees must think about health and health expenses and long-term care and critical illness, all the things that can happen in retirement, and ask whether they’re properly prepared.
It’s a matter of getting them to better understand the calculations and forecasts involved and the realities of market volatility, inflation, longer life expectancy and impending health risks.
For one, they should realize they can’t rely on the government for their well-being. Boomers with average working income beyond median levels could not maintain their standard of living on the Canada Pension Plan alone, and Old Age Security benefits can be clawed back once income reaches a certain level, writes economist Sherry Cooper in her book The New Retirement.
“Large nest eggs are required to cover the uncertainties of not knowing how long you will live (longevity risk), how large financial asset returns and inflation will be (income risk) or how much money you might need for unexpected but necessary expenditures (contingency risk),” she says.
When asked, most employees will underestimate their life expectancy, says Filion. With a 65-year-old couple today, there is a 30-per-cent chance one of them will live to 95, so if they retire at 55 or 60 they have to plan for 35 to 40 years without a new source of revenue.
According to the CPP, a 65-year-old female has a life expectancy of 22 years while a male has 19.3 years (contrasted with 1961 when a 65-year-old female had 16.1 years and a male 13.5 years).
Incentives and tools
To help, employers can provide incentives and tools such as matching contributions for pension plans or registered savings plans, or auto-enrolment in such plans. These tools can lead to significant rises in contributions.
“People are happy that someone takes charge but they can still opt out of these solutions,” says Filion.
Phased retirement or delayed retirement could not only help with the pending labour shortage for skilled workers but also help employees save longer for retirement.
“If you want to match your material lifestyle expectations, one way to make it happen is to retire later because it’s a double whammy — you can contribute longer and you need the income for fewer years, and you earn interest for longer,” says Brown.
Employers can help shine some light on the questions through retirement planning sessions by providers, with trained advisors available. These sessions can also give employees an idea on what newer products and services are available to help them understand what they need for retirement. They might think of the different levels of needs — to cover the basics, to maintain their lifestyle, or to leave an inheritance behind, says Filion.
But employers face a few obstacles too when it comes to helping out employees, such as fears of liability and lawsuits. There’s certainly a debate as to where employer responsibilities stop, says Filion.
“If you give advice, you could be held responsible. If you don’t give advice, you could be held responsible also. I’m not sure the industry as a whole has an answer right now. But what must prevail are the needs of new and incoming retirees.”
However, any modelling tools put in front of employees have caveats and cautions built into the front end so employees don’t place an inordinate reliance on the outcome, says Connor.
“They’re more directional as opposed to hyper-precise projections,” he says.
But all the literature and tools and incentives in the world might not be enough.
“You can lead a horse to water, that doesn’t mean they will drink,” says Brown. “There’s pretty strong literature that says attempts to educate workers fall on infertile soil.”
Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter. For more information, visit www.hrreporter.com/ccbr.
