As part of financial education in the workplace, there tends to be a greater emphasis on the accumulation phase of saving and less so on how to approach decumulation. With the Baby Boomer wave shoring up thousands of new retirees on a daily basis, strategies to convert savings into income that lasts a lifetime are more important now than ever before.
There are financial education opportunities that are far less understood and warrant some time in the communication spotlight. A topic that rarely get promoted is when to start Canada Pension Plan (CPP payments).
Bringing our Canadian retirement system into context means considering three distinct pillars:
1) Federal government programs (CPP, Old Age Security and Guaranteed Income Supplement)
2) Personal savings - Registered Retirement Savings Plans (RRSPs), Tax Free Savings Account (TFSAs) and other non-registered account, personal equity, home and vacation properties and equity in business, inheritances, etc.
3) Workplace pension programs.
CPP quick facts.
CPP is part of the federal government program. It proves a basic retirement income up to a maximum of 25 per cent of the Year's Maximum Pensionable Earnings (YMPE).
In order to receive the full retirement benefits, the normal retirement age for CPP is considered age 65. Canadians who've contributed to CPP and are entitled to receive a payment can start collecting as early as age 60, but they must start receiving CPP no later than age 70.
Anyone who starts receiving CPP before age 65 is penalized with a reduction in monthly payout. For each year a person defers receipt of CPP payments, they receive 8.4 per cent more annually to a maximum of a 42 percent increase in their CPP payment at age 70.
Is a bird in the hand better?
While there appears to be financial advantages to deferring CPP payments, many Canadians are reluctant to do so. This is due to what is called the bird in the hand attitude. People believe it is better to have the money now. They also worry that if they defer CPP payments, there won't be any federal money left for them if they wait too long.
Questions worth asking.
When to start CPP payments really depends on individual preference, comfort level, health status and wealth accumulation. For those not sure when to start, here are some questions to narrow down the right time:
1) Are you planning to work past age 60 and if so, for how long?
2) a. Is there a phase of your retirement when you believe you'll most enjoy having more money available? Chances are that people are their healthiest soon after retirement and as they continue to age, the chance of health deterioration increases.
There are three phases to retirement called:
1) The go-go years - when you're most active. Will you need extra cash that early CPP payments will provide?
2) The slow-go years
3) The no-go years - are you worried your funds will run out and deferring your CPP payments will help bridge you during this period of your life?
2) b. Consider your life expectancy while factoring in your personal health situation and family history.
3) What will taking CPP early cost you? There are some easy and free online early CPP calculators available including: the Government of Canada, and Tridelta. Doing some easy math to analyze the financial impact of taking CPP early helps with monthly income projections in retirement.
A lot to consider.
When to start CPP payments really depends on the person asking the question. Helping them walk through the process by providing important questions that facilitate insightful responses may make it easier for them to decide where to go from here. We're fortunate to have the freedom to choose when to start CPP, but for those worried about ensuring their savings last a lifetime, selecting the right time is key.
Questions about when to start CPP payments will continue to increase and we want to ensure you're well equipped to address those questions as part of your workplace pension program communication strategy. We invite you to contact us. We're here to help so that you can focus on what you do best.
By the year 2020, Millennials will represent 50 per cent of the global workforce.
Who are Millennials?
Millennials or Generation Y represent a demographic cohort born between 1980 and 2000.
There are many stereotypes for Millennials with comments ranging from tech-savvy, educated and energetic to entitled, disloyal and cynical.
Generalizations can be harmful and it isn't a safe bet to broad brush the characteristics of a generation, especially when developing a benefits communication strategy. However, there are some common traits relevant to Millennials that include:
1) a strong feeling of online connection
2) an interest in teamwork
3) a heightened need for choice and control
4) a greater use and comfort with social media, video, online interactions and text messaging.
While these traits may take precedence, it doesn't mean they don't value face to face communication, especially for complex topics or where a series of questions may result.
Regardless of the medium, this generation has a strong appreciation for accurate, straightforward and current messages that are easily digestible and void of corporate spin or jargon.
Do Benefits Matter?
According to a recent report by Ebix Consulting, 49 per cent of Millennials said their employee benefits were a strong driver of financial security and peace of mind. Knowing that benefits matter also requires a keen understanding of this cohort's communication style preferences.
Here are some tips to consider when developing benefit and pension plan communications for Millennials:
1) Make it easy. Make it accessible.
Mirror the experience they have when accessing information in their personal lives. Don't make it difficult to source plan information. Feed them vital communications through their preferred social media channels throughout the year.
2) Make it fun. Make it transparent and real.
Think about how you'd communicate with a friend. Apply appropriate humour and disruptive quirky messages to catch their attention and engage them by keeping it real. Avoid corporate spin particularly if the message may be difficult or seen as a benefit takeaway. Just explain the reason for the change without any spin.
Regardless of generational cohort, revisit communications with a plain language filter. Keep to a Grade 8 reading level or lower and avoid acronyms or legal terms.
3) Keep it short. Make it current.
Limit the amount of text so that it is easily consumable and not overwhelming. Consider adding hyperlinks and scrolling news feeds as well as short articles and videos.
Keep messages timely and revisit as appropriate using other Millennial communication channel preferences. People have limited time and attention spans for benefits communications so don't let your approach make it hard to get your message across effectively.
4) Show all options. Feature flexibility.
Make it clear what benefit plan options exist and how to find more information easily.
5) Invite participation. Start a conversation.
Give the audience an opportunity to participate and have a say. Demonstrate the importance of their ideas and opinions. Create short, fun surveys with humour and irony -- similar to what they use outside of work (Think of the style of quizzes on Buzzfeed.com)
No matter the generational cohort, benefits communications are better served when their target audience is understood and messages are tailored to resonate effectively with them.
Leverage our experience.
An important overall goal for any benefits communication is to create positive and effective messages that reach their intended audience. Creating confidence in the desired call to action, behaviour change, awareness campaign or knowledge transfer is best served when messages, regardless of medium, help employees understand, appreciate, and use their plan(s) wisely.
We have decades of experience communicating to employees of every generation under our belt. We're excited to share our best practices with you. So please contact us. We're here to help so that you can focus on what you do best.
Retirement readiness is an important part of financial wellness yet many people approach retirement feeling ill prepared and often realize too late that planning for such an important financial milestone was something they should have paid greater attention to earlier in their working lives.
What is retirement readiness?
The DC Institutional Investment Association's Financial Wellness Task Force (DCIIA) defines retirement readiness as varying by individual and based on:
- his or her goals and needs in retirement;
- wealth outside of the retirement plan;
- ability and desire to generate income in retirement years,
and other factors such as longevity.
A lack of employee retirement readiness costs employers
The reasons employees benefit from being retirement ready are pretty easy to understand and appreciate. What about from the employer's perspective? When employees don't feel they have the financial freedom to choose the ideal time to retire, there is a stronger tendency for them to stay in jobs that disrupt the natural progression of the workplace. The greater the number of older workers, the greater the propensity to experience increases in the cost of salaries, health care, worker's compensation and disability.
As per the DCIIA's Financial Wellness Task Force, retirement readiness is critical for an employer to appropriately manage its human capital. Additionally, an employer's approach to educating about retirement planning can help attract and retain employees, but also manage the cost of its workforce.
With more than 10,000 Baby-boomers turning age 65 on a daily basis, the topic of retirement readiness takes centre stage. The question remains, who is financially ready to retire?
Who's ready to retire?
Prudential's report, Do You Have a Good Sense of Your Retirement Readiness, indicates that more than 43 per cent of Americans inaccurately assess their retirement preparedness. Their inaccuracy can go either way -- perhaps worrying too much or not enough.
In an annual human resources study conducted by Morneau Shepell Ltd in July 2017, the results from questioning 370 employers across Canada revealed that over 90 per cent of HR leaders worry about employees' level of retirement preparedness. This concern was greater for those participating in defined contribution rather than defined benefit pension plans.
In New York Life's Financial Stress and Retirement Readiness Report, 73 per cent of respondents reported feeling moderate to extreme financial stress over the last 6 months and 60 per cent said they were behind or far behind schedule in their saving for retirement.
How do you assess retirement readiness?
According to Sibson Consulting's report, Quantifying Retirement Readiness, assessment factors include three typical metrics:
1) Replacement ratio -- this ratio is the required income for retirement as a percentage of income just before retirement. This is often represented as a ratio of 70 to 85 per cent of pre-retirement income (including government sponsored programs such as Old Age Security and the Canada or Quebec Pension Plan). Many assume age 65 as the most common retirement age.
2) Wealth accumulation target -- this is the total savings an employee needs to carry through the length of their retirement. For example, if an employee retires at age 65 and aims to replace 85 per cent of his income, he needs 11 times his final pay. The target amount decreases for each year the employee pushes back his retirement date.
3) Retirement readiness grade -- this is a grade given to employees to track their financial preparedness and retirement readiness progress.
There are many reasons why employers are incorporating educational components specifically related to retirement readiness into their wellness programs, financial literacy campaigns and pension plan education workshops. When employees are stressed and anxious about their financial present and future, they tend to be less productive and more distracted at work. Lapses in quality are linked to customer satisfaction. When these decrease, the risk to a company's bottom line may also be compromised.
Taking an intergenerational approach to supporting retirement readiness for all employees is something we're keen to talk to you about. We invite you to contact us. We know that helping employees confidently save for their goals including retirement benefits the employer too. We'd like to explore options that are best suited to your workforce needs. As always, we're here to help so that you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.