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.
Registered Retirement Savings Plan (RRSP) season is upon us. Canadians have until 11:59PM on March 1 to make an RRSP deposit in order to reduce their 2016 taxable income.
As challenging as it may be for employers to educate their workforce about the benefits of saving, budgeting, and putting away funds to maximize their tax efficiency, RRSP season is the perfect time to reinforce key messages that may have been already communicated throughout the year.
RRSP season creates a need-to-know, just-in-time strategy that may be just enough to drive home some key savings tips. RRSP season also creates a window to educate, inform, and motivate employees.
Tips and Reminders
Reminding employees that RRSP season can be a great time to save even if it means taking an RRSP loan. Their return can be used to pay off the RRSP loan quickly. If employees find themselves in a RRSP loan situation, remind them of easy ways to make monthly contributions in order to avoid finding themselves in the same position next year.
Sprinkling RRSP tips throughout the year and creating opportunities for employees to learn ways to pay themselves first through monthly deductions will reduce the last minute RRSP contribution deadline dash. We have several tips and resources to support your financial literacy and RRSP season communication campaigns. Please contact us, we're here to help so that you can focus on what you do best.
With November known as Financial Literacy Month (FLM), it is a meaningful time to write on the topic of retirement preparedness particularly for many Canadians facing decisions about whether to continue working or make the transition into retirement.
For some, they might be standing on solid footing with their plans well established and investments well managed. For others, it is a time of increased stress and anxiety as their inability to make financial choices earlier in life has finally caught up with them. They didn't win the lottery, and there was no wealthy estranged relative who bequeathed them a tidy inheritance. They now find themselves in need of a Plan C.
With 10,000 North American Baby Boomers continuing to retire each day, surveys on the topic for retirement readiness become more prevalent. Consistency in the survey results is not surprising. The majority of people worry about whether they've done enough to plan effectively for that big day. While these worries are personal, there are many reasons why employers should care.
1) Worries about having enough saved for retirement inhibits productivity for those actively still at work. Anxiety about finances impacts energy, focus and confidence in the workplace.
2) If an employee can't retire based on his current savings, he may stay in the workplace longer than others producing greater results as highly effective contributors. Staying only because one can't afford to leave creates disengagement and the potential for an unhealthy succession bottleneck that may cause a ripple effect for younger workers who don't believe they have a clear path for advancement.
3) The cost of benefits increase with an aging workforce as the potential for chronic disease and other health issues puts more strain on costs associated with employer sponsored benefit programs.
While there are many studies targeting retirement preparedness, I'm highlighting two -- the 2014 Conference Board of Canada Study and the Ontario Securities Commission, Retirement Readiness, Canadians 50+.
In 2014, The Conference Board of Canada study polled over 2000 people. The results revealed that more than 40% of respondents had no clear understanding of exactly how much they needed to save for retirement.
Other highlights of this survey reveal:
a) 60% of respondents feel they haven't saved what they need for their retirement years;
b) More than 1/3rd of Canadians don't know when they will be in a financial position to retire;
c) More than 40% of employers think their workers are overly optimistic about when they will be in a position to retire;
d) 60% of existing retirees think they have enough retirement savings to meet their needs, but believe they might have financial difficulties over time.
The second survey was commissioned by the Ontario Securities Commission (OSC). Polling over 1,471 Canadians aged 50 or older, it found that 22% of these surveyed Canadians hadn't started to save for retirement and 31% of those who had started saving, felt they were behind in their retirement plan. Similar to the Conference Board of Canada Study, 38% of the OSC survey respondents reported they had no idea how much money to save for retirement.
When asked how they are saving for retirement, 36% of respondents shared that they rely on an employer-provided pension plan and 25% said that they will rely on the Canada Pension Plan or Quebec Pension Plan as well as Old Age Security as their primary post-retirement income stream. Of the pre-retirement survey respondents, 40% believe they will be in worse financial shape in retirement and that their standard of living would be compromised.
This human capital issue remains an individual one, yet with employees spending so much of their waking hours in the workplace, employers have the ability to influence the information and resources made readily available to their teams.
Helping workers feel more confident and well informed about retirement planning is in everyone's best interest. There are increasingly more free tools available to support retirement preparedness and we invite you to contact us to explore what might best apply to your workplace. As always, we're here to help so that you can focus on what you do best.
With all the discussion about the need for enhancements to CPP, the reason behind it is the motivation for this blog topic. It is widely believed that many Canadians struggle with financial literacy and don't take an active role in effectively managing their finances or saving enough to meet their retirement needs.
What is surprising is that Canada's average debtor may not be who we think. New data released by Statistics Canada and highlighted in the infographic associated with this post, suggest that those most in debt are well educated and think of themselves as quite financially literate. They aren't those with low income or little education. The data reveals that they understand the debt they have taken on and they believe they can afford to pay it off.
Canadian debt is on the rise with savings not in a place that has the feds or the provinces feeling that they couldn't help but intervene in the form of forced savings through the CPP enhancement. With November being Financial Literacy Month (FLM), it is an timely opportunity to remember that it is never to early to start discussions about the importance of money management and what financial preparedness entails.
When considering the money landscape, it has been reported that 1 out of 3 Canadians struggle to keep up with their finances and when we zero in on youth and money, 60% of youth report carrying some debt and one third owe more than $10,000. Credit card debt and student loans are the top two categories for Millennials.
The Financial Consumer Agency of Canada (FCAC) has a national strategy to help Canadians become more aware of the importance of financial literacy. They are inviting us to join the conversation on social media using the hashtag #CountMeInCA to share tips and to tell them what we're doing or what resources we're using to manage our money and debt responsibly as well as how we're saving for the future.
The FCAC offers a 4 step process for improving financial literacy:
1) Take the self assessment quiz. This short and free quiz helps to test one's financial literacy skills and reveals how you compare to other Canadians based on their responses.
2) Search on the Canadian Financial Literacy Database. It holds a range of financial topics related to budgeting, money management, saving, investing and more.
3) Take action and build a financial literacy "to do" list.
4) Participate in Financial Literacy Month.
Learning more about financial literacy and creating breathing room to save for the future starts with gaining knowledge and confidence through good money management and a strategic approach to debt reduction. With so many Canadians struggling to make end meets with pressing financial obligations, the idea of saving for the future often doesn't seem like a realistic priority.
As with anything that seems too much for one person to manage alone, seeking help and guidance with financial preparedness is no different. The FCAC website provides a list of questions to ask when looking for professional advice.
We're ready to answer your questions. For over two decades, we've been helping companies with their retirement savings programs along with ways to improve financial literacy in the workplace. We invite you to contact us. We're here to help so that you can focus on what you do best.
*source - Finance Consumer Agency of Canada
As I look around my community, I see more retirement and assisted living centres being built. It has been a gentle progression over the last ten years. Canada is slowing becoming a nation of aging people. The construction industry seems to grasp the shifting needs of Canadians and has planned for these changes in their housing requirements, but for some reason, the uptake on moving the emphasis toward communicating investment strategies targeted at decumulation has fallen short.
The statistics are consistent and obvious. In the U.S.,appoximately 10,000 people retire every working day and in Canada, we see about 1500 Canadians doing the same. Yet retirement education continues to focus on wealth generation and accumulation strategics.
We know a lot about the demographic shifts and the influence of the Baby Boomer population (born between 1946-1964). These numbers reflect 4 million people retiring every year over the course of a 19 year period. This translates in the 22.8 percent of Canadians as 65 or older from 2010 onward. Another way of interpreting the data is to compare 1961 stats to 2010 (when the first boomer turned 65). In 1961, the median age in Canada was 26.3 and in 2010, it was 40.6.
Right now, there are more people between age 55 to 64 who are preparing to leave the workforce than there are those planning to enter it. These numbers speak volumes and I believe we need to confront what lies ahead with mindful and strategic consideration. We have time to plan, focus, and emphasize the changing focus of pension plan communications. A practical approach that fully acknowledges the demographics forces at play will honour those who need the guidance and the continuing support.
For years, the pension industry has placed a concerted effort on capital accumulation and growth, but according to Dr. John Por of the Decumulation Institute, by 2022, $2 trillion in financial assets held by various Canadian financial institutions will be converted into retirement income.
Many people feel uncomfortable or awkward about discussing budgeting, saving, or planning for retirement. Perhaps has something to do with acknowledging the aging process, yet we all know that time waits for no man. More information on the views of Canadians on this topic have been captured in the IFEBP's recent white paper entitled, "The Path to Retirement Security in Canada"
The more energy that can be spent on a multi-pronged approach that provides advice, tools, and information related to decumulation tactics during every phase of the savings and retirement planning lifecycle, the better prepared North Americans will be for the time when they need to begin the divestment process.
With equal consideration, employers would benefit from holding pension workshops that provide resources and support for decumulation of investment assets so that plan members aren't facing a dilemma of what to do just a few short months before their retirement date. Just as it takes time to prepare for a decision of this nature, it also warrants equal focus on preparing for decumulation well before retirement.
It's time to make the leap and bring more of a balance to the dialogue and the tools available to help our aging workforce. Please contact us. We're here to help so that you can focus on what you do best.
Are sideburns in or out? Are skinny jeans still in fashion or not? These are not topics that preoccupy my thoughts, but I do regularly contemplate trends when it comes to the benefits industry. It is an area of importance for my practice and particularly for how I consult with my clients.
Strategy involves being aware of and remaining ahead of the curve. With that said, this post relates specifically to what I consider to be some of the top trending topics in the realm of Canadian employee benefits. Since my first post in October 2012, I've blogged about each of these 5 areas on more than one occasion. For ease of reference, I've included a link to some of my past posts within each trending topic.
1) Employee Wellness: increasingly, employers are looking for ways to dial up productivity and engagement levels and in so doing, they recognize the need to consider the employee from a holistic perspective. More and more companies are embracing wellness programs and determining the baseline metrics to establish success criteria. Whether it is something as simple as supplementing worksite vending machines with healthier food options or hosting wellness fairs, it is time to consider what wellness programs can do to add to the overall staff experience while driving success for better employee health outcomes.
2) Mental Health: Whether via mega employers like Bell Canada through their mental health anti-stigna "Lets Talk" campaign, or Great West Life's Centre for Mental Health in the Workplace, the focus is consistent because the statistics are staggering -- mental health issues are a real concern in Canada. According to the CMHA, 20 percent of Canadians will personally experience a mental illness in their lifetime and approximately 8 percent of adults will experience major depression at some time in their lives.
Back in January 2015, I wrote about mental health indicators for Canada and how they influence group benefit plans. At that time, a national commission had just been released regarding a compressive study on the state of Canada's mental health. Mental health claims represent approximately 12 percent of disability claims according to CMHA. Many employers see dips in productivity well before a disability claim surfaces through sporadic absenteeism, workplace safety, and more regular issues of lack of focus and emotional reactivity among colleagues.
3) Prescription Drugs: Weighing in at 13 percent of total health expenditures in Canada, prescription drugs have been an area of focus for a long time. Costs are high especially when specialty drugs factor in the the equation -- just as I wrote about with new hepatitis C short term treatments. Cost management trends include ways to mitigate these risks through pay-direct cards, mandatory generic substitution, dispensing fee caps, preferred pharmacy networks and prior authorization.
4) Financial Literacy: November is financial literacy month and with it comes many reminders of free online tools available to help Canadians manage their money and save for retirement. These reminders are important as employees continue to experience stress due to financial woes. Many Canadian struggle to make optimal financial decisions and don't have more than $2000 in an emergency fund. When employees are stressed about their finances, it impacts their ability to focus and be productive at work. Increasingly, employers are placing more emphasis on providing financial educational opportunities as part of wellness programs.
5) Benefits Communications: Whether designing a benefits plan or making tweaks to an existing arrangement, the need for excellence in benefits communications is ever present. Driving up plan member pension participation rates or gaining appreciation for the value of the total compensation package, employers continue to seek ways to catch employee's attention.
Considering the demographic changes and the life cycle of the workers moving along the employment continuum are also areas of focus for our firm as we address trends with our clients. As Wayne Gretzky said, "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." We believe the same concept holds through in the benefits industry. We invite you to contact us, we're watching where the benefits 'puck' is going to be so that you can continue to focus on what you do best.
I've written a fair bit about the importance of saving for retirement and specifically on both the topic of Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs). Now, I'm focused on sharing the differences between RRSPs and TFSAs.
Like supportive teammates on a winning sport's team, both savings vehicles make for great contribution methods. Depending on the individual's specific needs, income level, and stage of life, one may be a better option than the other. It really depends.
Many Canadians are familiar with RRSPs as they have been around 1957. TFSAs are the new kid on the block. They've only been on the scene since the 2008 Federal Budget. As the new player, they are not as top of mind as RRSPs tend to be.
Ideally, if you've met with a trusted financial advisor, you will be encouraged to invest in both an RRSP and a TFSA. Not many folks have extra cash hanging around, but with some smart savings goals or when the occasional windfall happens, it is helpful to understand the differences as well as pros and cons of these two heavy savings hitters.
When it comes to RRSP contributions, the limits continue to increase on an annual basis. In 2015, the allowable contribution is 18% of your earned income from the previous year to a maximum of $24,270 for 2014, $24,930 for 2015 and $25,370 for 2016. The allowable contribution is deducted from the gross taxable income for the year, which may lead to a nice tax refund that could potentially be put into a TFSA. RRSPs create a tax deferral. Basically, the payment of income tax is shifted until retirement when forced annual withdrawal amounts are required after age 71.
Turning our attention to the TFSA, it can be described as an all-purpose savings vehicle that can be used for any savings goal. Canadians are able to invest up to $5,500 annually and may carry-forward any unused contribution room. Investment growth that happens in the TFSA is tax sheltered whereas the annual contributions are not.
A helpful feature of the TFSA is that withdrawals don't incur tax and the full amount of a withdrawal can be resubmitted into the TFSA in future years. In addition, TFSA amounts don't affect the eligibility of federal income-tested benefits like Old Age Security. When the saver turns 71, he isn't required to withdraw any money from the TFSA. This becomes an attractive savings option for seniors.
Whether you're looking for help with understanding RRSPs or TFSA or another retirement savings vehicle, our team is well positioned to address your questions. We can show you how to maximize your plan member's savings opportunities and mitigate the risk of unwanted financial surprises such as unexpected tax deductions. Contact us. We're here to help so you can focus on what you do best.
With the RRSP deadline looming, many Canadians turn their attention to saving for retirement with an emphasis on accessing goals they may have set for their future.
While there are numerous studies indicating that Canadians aren't saving enough for retirement coupled with tendencies for many to shy away from pursuing greater financial literacy, Statistics Canada reports that in 2011, registered pension plans (RPPs) rose slightly while pension coverage dipped. Pension coverage rates decreased 0.4% to 38.4% in 2011 compared to 38.8% in 2010.
Looking closer at this report, RPP membership is up 0.8% (49,000 members) from the same period a year earlier. Specifically, public sector pension plans rose 0.6% while private sector plans rose 1% comparably. Public sector pension plans still hold the leading spot with 52% (3.1 million members) of total RPP membership. In the private sector, RPP coverage remains around three million active members although coverage has declined from 28% to 24%.
What about the type of plan? Not surprisingly, membership in Defined Benefit (DB) plans is down 0.1% from 2010. As for Defined Contribution (DC) plans, membership saw an increase of 3.5% compared to the same period a year earlier. A fact sheet from the Office of the Chief Actuary reports that the shift away from DB plans continues with a decline to 73% in 2011 from 83% from 2001. The main outliner remains in the public sector where Defined Benefit coverage remains stable at 94% membership.
Increasingly, women continue to join RPPs with an rise in 2011 of 0.8% over 2010. Women represent 49% of total membership versus men at 50.1%. As participation in RPPs slowly increases for women, men no longer account for membership percentages in the 75% range like they did in early 1970s.
The focus on the importance of saving for retirement continues as plan sponsors seek ways to engage their plan members through education sessions, print and online awareness mechanisms.
For additional tips and resources to help drive up pension plan participation, please contact us. We're here to help so that you can focus on what you do best.
With the deadline for Registered Retirement Savings Plan (RRSP) contributions for the 2013 tax year directly ahead of us on March 3, 2014, it is timely to consider both the value of an RRSP and Tax Free Savings Account (TFSA).
RRSPs took the main stage back in 1957 when they were first introduced by the Canadian government. It wasn't until January 1, 2009 when TFSAs were established.
According to Statistics Canada, less than one in three eligible Canadian tax-filers contribute to an RRSP. A similar situation presents itself with TFSAs. According to an ING Direct Survey, 53 percent of Canadians haven't opened a tax-free savings account (TFSA) because they feel they don't have the money to open one. The survey results also indicate that 42 percent of Canadians aren't planning to open a TFSA in 2014.
A survey by BMO Bank of Montreal indicated that there are more Canadians in 2013 (48 percent) who opened a TFSA than in 2012 (39 percent). TFSAs experience higher adoption rates in British Columbia, Alberta and the Prairies (all over 50 percent) whereas comparatively, the weakest adoption rates are in Atlantic Canada (34 percent). Canadians primarily open TFSAs as a vehicle to help them save for retirement as well as a source of funds for emergency situations.
According to the latest BMO study, more Canadians have an RRSP at 67 percent than have a TFSA at 39 percent.
The ING Direct Survey found that 31 percent of Canadians agreed that they don't understand the value of a TFSA or are familiar with the rules. The BMO survey cited that only 19 percent of respondents knew the contribution limit was $5,500 and only 11 percent identified all six types of eligible investments within a TFSA.
The value of a TFSA includes not paying tax on the earnings in the account as well as its flexibility -- there are no penalties for withdrawing money. Canadians who open a TFSA also have the ability to carry over unused contributions.
Knowing about TFSAs and how they are taxed is important. Understanding contribution thresholds help to avoid over contributing and any complications that come with a lack of awareness of the specific TFSA rules.
If you are looking for ways to engage employees about the benefits and features of a TSFA or an RRSP as a savings tool, please contact us. We're hear 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.