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Pension trends: How can plan sponsors manage boomers’ unrealistic retirement expectations?

“The times, they are a-changin’,” sang Bob Dylan in 1964. While the context is different, the same is true for retirement today. The year this song was recorded is significant: it represents the final birth year of the baby boomers. While these Canadian boomers—who, says Statistics Canada, make up 29% of the population—will reach retirement age in even greater numbers in the coming years, they’re different from the pre-retirees of previous generations. They’re less prepared for their golden years, so plan sponsors will have an even more significant role to play in their retirement readiness.

In 2014, Fidelity Investments Canada polled 1,380 Canadians age 45 or older (690 retirees and 690 pre-retirees). The research provides an interesting snapshot of the changing retirement mindset in Canada.

One major trend, as companies move away from DB pension plans, is shifting more responsibility to the employee. In a DC context, employees are increasingly responsible for making vital savings and investment decisions to ensure their retirement security. On top of that, the number of retirees is rising fast, and they’re living longer.

In this new environment, how prepared are Canadians for their golden years? Fidelity’s latest research reveals more than three-quarters (78%) of pre-retirees surveyed feel generally positive about life in retirement from an emotional and financial standpoint.

However, as the research shows, some may be predicting unrealistically favourable scenarios. For instance, 47% of pre-retirees plan to rely on income from a second post-retirement career. This option may seem attractive, but planning to work in retirement isn’t a retirement plan. And this option may not even be available: 48% of the retirees surveyed retired earlier than planned, often involuntarily. One in five respondents say they had to retire early because of health problems. Another 23% feel employers don’t want to hire retirees, and 15% can’t find a job.

Real estate is another area where expectations may not meet reality. Half of pre-retirees are putting their trust in home equity as part of their retirement paycheque—an 18-percentage-point rise since 2005. Yet home equity was a source of income for just 36% of retirees in 2014, underscoring the fact that turning your house into liquid cash can be much more challenging than many initially perceive.

Top 5 RISKS

What are the top retirement income risks Canadian pre-retirees worry about?

  • 58% – inflation
  • 53% – healthcare
  • 49% – longevity
  • 46% – asset allocation
  • 46% – withdrawal rates

Source: 2014 Fidelity Canada Retirement Survey

 

Apart from being underprepared for retirement, today’s boomers are increasingly saddled with responsibilities for both children and parents. Of the pre-retirees surveyed, 62% report feeling a financial tug from children on one side and aging parents on the other. As the old-age population skyrockets in the years ahead, the number of individuals in this situation will significantly increase, and some will remain in the so-called sandwich generation even in retirement.

What Plan Sponsors Can Do

Financial literacy is a key part of saving for retirement. Helping employees better understand retirement is vital in preparing them to navigate the shifting sands of the post-employment landscape. Plan sponsors can offer education on longevity risk, long-term inflation risk and the impact of market performance on investment returns over time. It’s also important to present this information in an engaging way. To achieve greater communication effectiveness, sponsors can use the web, including social media platforms. Human interest stories about the retirement experiences of past employees are usually effective because people relate to other people. All of this would create something more engaging than simply laying out facts.

Plan sponsors must play a role in bridging the retirement knowledge gap. Without the correct guidance, people may not have the tools to make decisions to ensure a quality post-employment lifestyle.

Originally published on My Benefits website by Peter Drake. Peter Drake is vice-president, retirement and economic research, with Fidelity Investments Canada.

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