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.
Just as with the arrival of each new season, an annual deadline looms for any Registered Retirement Savings Plan (RRSP) contributions to be allocated toward the previous year's income.
And the deadline is...March 1, 2018
This year, the deadline falls on March 1, 2018. It is difficult not to be reminded of this important date as banks, insurance, trust companies, financial advisors, and lending institutions have their RRSP contribution campaigns in full swing. Long before the start of the new year, many savvy employers launched savings campaigns to remind their employees of the many reasons to save for retirement and the benefits of contributing to an RRSP.
Communicate well, plainly and often.
The ultimate RRSP contribution message is two-fold: save early and regularly for retirement and in so doing, lower your taxes for the previous year.
Most, if not all of us, appreciate timely reminders to know when to take action regarding an important deadline. It's human nature to believe we have more time to do something than is true in actuality. The term 'time flies" is never more relevant than when the RRSP deadline approaches. Just after paying off December's credit card bills, we're faced with the reality of not making regular contributions toward saving for retirement because we thought we had more time.
Examples, images, videos with testimonials provide stronger and clearer methods for communicating the key savings message and RRSP contribution call to action. Hearing from one's trusted colleagues likely holds more credibility than a recommendation made from a high ranking senior leader who works in another part of the country and who most junior employees have never spoken to or who probably will never meet.
Need to Know Info.
- What the contribution limit is. For the 2017 tax year, the RRSP limit is the lesser of 18% of one's 2017 gross income or $26,010.
- Employees need to know how to find out their available RRSP contribution room by checking their notice of assessment and that this can be done easily by logging into the Canada Revenue Agency (CRA) account or by contacting the CRA.
- They also need to know that unused contribution room carries forward unless the maximum deposit is made every year.
- The big no-no is taking out any funds from one's RRSP early. It means that tax must be paid on the full amount taken out and worse, that RRSP contribution is lost except when a) paying into the Home Buyers' Plan for a first home and b) to help pay for post-secondary education - Lifelong Learning Plan.
- Understanding the value and difference of a Spousal RRSP is important too. Knowing who can contribute and when it is best to do so as well as who owns the RRSP and who is responsible for designating a beneficiary when it is a Spousal RRSP (It is the spouse who owns it and who names a beneficiary). These tips and more can and should be communicated.
Driving at intrinsic motivation.
The idea is not to make figuring out what to contribute to one's RRSP a mad dash on the day before the deadline. Helping employees visualize what saving now can do to build freedom and choice in their future, is a worthwhile undertaking.
There are fun ways to "do the math" and illustrate the impact of what a savings delay of 5, 10 or even 15 years could mean to an employee's potential nest egg. Conversely, empowering employees to see that the success of their financial future is well within their grasp. There are so many creative ways to depict the power of saving early through the magic multiplier of compound interest, investing early and deferring taxes for a time when one's income is reduced.
Ultimately, an ideal and easy approach for RRSP contributions is to let automatic regular deposits take the pain out of making a savings transaction happen. When an RRSP contribution comes right off an employee's pay, the employer can reduce the income tax coming off the employee's pay too. While the tax advantages may appear obvious, they still warrant being regularly communicated.
With over 30 years industry experience, we've worked with employers of every size to implement savings programs and communicate key messages that make saving for the future a priority not to be postponed.
Brimming with pro tips, we invite you to contact us. Let's talk about ways to optimize your employee saving campaigns, now, and throughout the year. 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 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
At one time, defined benefit pension plans were the norm. This might have been considered the post World War II golden age when workers stayed with one employer their entire career, had retirement farewell gatherings, were given a company watch and were reassured that their retirement annuity cheque would arrive monthly for the rest of their lives as a reward for their long years of service and dedication. According to Stats Canada, back in 1971, almost 50% of company pension plans for male workers were defined benefit arrangements. Fast forward to 2011 and that percentage drops to 25. Aside from the public sector, the shift away from defined benefit pension plans has been strong and steady. Many existing plans have also introduced grandfathering for retiree benefits.
It seems that the topic of pension reform has been much talked for almost a decade now. It is also well recognized that a widening gap exists for what public sector pension arrangements are able to offer Canadians workers during their golden years.
Several previous attempts at CPP reform failed. Now, with 8 of 10 provinces on board — excluding Manitoba’s Tory government who is still too new, and Quebec, with its separate approach through QPP — we appear to be moving ahead at full steam.
Something needed to be done given household debt in Canada leads the industrialized world. Perhaps we’ve been lulled into a false sense of predictable low interest rates allowing us to carry even higher amounts of debt.
In Ontario, the ORPP was set to launch in 2019 and if nothing else, it created more motivation for the feds to try again and seek the support of at least 7 of the 10 provinces representing at least 2/3 of the country’s population. In Ontario, we are ready to put ORPP plans on the shelf as CPP expansion was always the preferred approach to foster Canadians’ ability to save for retirement.
While not able to address those close to retirement or those who didn’t contribute much or anything and are now retired or quickly facing retirement, CPP reform will more fully support the savings needs of younger workers as well as those earners in the middle category who are earning in the range of $50,000 to $80,000.
Workers under age 45 and at these middle income levels appear to be most at risk. There are a number of possible contributing factors that result in an incapacity to save due to stronger competing forces vying for a limited pool of funds. Whether it is lingering student debt, mortgage payments, credit card bills or simply keeping up with The Joneses, the reality remains that many middle class workers aren’t saving enough for retirement and without the help of CPP reform, they might not easily find a way to change their behaviour in order to create favourable savings outcomes.
Major CPP reform changes at-a-glance:
Employers play a key role in the savings scenario too as many seek to educate employees and raise their level of financial literacy. We’ve been working with group pension plans and employers for over 2 decades now and invite you to contact us. We’re here to help so that you can focus on what you do best.
With no immediate or foreseeable future for the expansion of the Canada Pension Plan (CPP), last month, the Ontario Legislative announced the passage of the Building Opportunity and Securing Our Future Act of 2014 and with it, the creation of the Ontario Registered Pension Plan (ORPP). It will be mandatory for Ontarians who currently do not have a workplace pension plan.
The ORPP will require equal contributions from both employees and employers. This plan is intended to expand pension coverage to over 3 million working Ontarians, but is not required for those currently participating in a workplace pension plan. With a goal of creating a system that doesn't burden younger contributing generations with additional costs, benefits to ORPP are earned as contributions are made.
KEY ORPP FEATURES:
There remains a great deal of work in terms of defining the details and administration practices related to the ORPP. Many are divided on their support for the ORPP. While the plan will be financially beneficial to those retiring in 30 years time, it may do little for working Ontarians without a pension plan who are less than ten years away from retirement. Others worry that Ontario remains economically fragile and will not be well served by a mandatory pension plan that pulls an additional 3.8% in contributions away from businesses. Additionally, there is concern about the administration costs for managing ORPP. Operating expenses for the CPP run over $600 million.
Differing opinions are more optimistically oriented to the benefits of the ORPP and carry a view that ORPP offers a fair solution to working Ontarians who increasingly see employers dropping defined benefit plan pensions or pension plans of any type. There is general recognition of the increasing need to help Canadians understand the importance of being financially prepared and saving for retirement especially when many do not have healthy scenarios when in comes to their financial outlook.
As they unfold, understanding the details of the ORPP will be important for Ontario-based employers mandated to participate. Please contact us for updates on ORPP or to learn more ways to enhance your benefits and pension plan offering. We're here to help so that you can focus on what you do best.
There is so much discussion about retirement planning both north and south of the border as governments address concerns regarding statistics that cannot be avoided -- people aren't saving enough for retirement.
While there has been much written about retirement planning as one of the most important financial goals a person can undertake, not enough people are taking the steps to ensure their future freedom from poverty or penny pinching.
In a recent PBS Frontline interview, over 900 people in any given 1000 person retirement plan in the U.S. will retire in poverty or run out of money before death. This statistic actualizes a major fear that retirees face.
How does a misstep like this occur? According to the Retirement Confidence Survey by the Employee Benefits Research Institute, 60% of workers have not accurately assessed the amount of money they will need to save for retirement. Fortune magazine published a study demonstrating that people with written plans had an average of five times the amount of money at retirement as those with no formal plans.
Another prevalent misstep is simply that people don't save enough. It doesn't come down to a decision regarding whether or not to consume but rather WHEN to consume. The simple premise remains that when people consume more now, less money has the opportunity to compound and grow. It comes down to the 'start saving today' principle, which has been said so much that the importance of it gets easily tuned out.
Jack Vanderhei of Employee Benefit Research recommends that a male who retires at age 65 after working 30 years and relies entirely on government sponsored pension plans and his own retirement plan needs to save 13.3% of his total income. Similarly, a female needs to save 14.1% because of her longer life expectancy.
The third major misstep in retirement planning is that people just don't start saving early enough. It can be an easy trap to fall into when there are so many competing priorities such as buying a home or putting the kids through university. Many in their twenties simply aren't thinking about saving for retirement when it seems that there is so much time to address planning later. Savings statistics show that the longer the delay before getting started, the harder it is to catch up and enjoy more financial freedom later in life.
For every 6 years a person waits to start saving, it doubles the required monthly savings to reach the same level of retirement income. The magic in this equation is that money is multiplied by time, which provides the power to compound wealth accumulation. In this scenario, procrastination and believing that there will be lots of time later becomes a costly mistake.
There certainly are other missteps that surprise people who don't plan or anticipate what may come down the road for them in their later years. From believing they will want to work forever to investing too aggressively or not enough, it is important to pay attention to retirement planning on a regular basis. It isn't something that should be a once and done exercise.
For more information about tips and considerations for avoiding retirement savings missteps, please contact us. We're here to help so that you can focus on what you do best.
Last Thursday, the provincial budget was unveiled and with it the introduction of the changes to the provincial government including first of its kind in Canada changes that will affect more than three million working Ontarians, many who rely on Canada Pension Plan (CPP), Old Age Security (OAS) and their own savings for retirement income.
Finance Minster Charles Sousa promises that the proposed ORPP would provide a maximum of $25,275 annually to future retirees who are young workers now with a goal of replacing at least 15 percent of their pre-retirement income.
The recommendation for ORPP gained momentum due to the federal government’s rejection of enhancements to CPP as well as the growing concern of Canadians lack of retirement savings.
ORPP targets middle-income earning Ontarians who are most at risk of undersaving and those who don’t have group pension plans through their employer. This cohort represents approximately two-thirds of workers in the province.
The new ORPP plan would be designed with features that mirror elements of the CPP and with the hopes that Canadian workers will be willing to pay now for more income later in life. For existing plan members of a group pension plan, they will not be required to enroll in ORPP.
ORPP is intended to be introduced in 2017 and just in time for expected reductions in Employment Insurance premiums with a two year phase in period.
Under the new ORPP model, contributions for a worker earning $45,000 annually would be $788 and would result in a maximum annual payout of $6,410. For a worker earning $70,000 annually, their ORPP contribution would be $1,263 for a maximum annual payout of $9,970. It is intended that annual contributions would be matched by employers, which would raise approximately $3.5 billion a year for the pension pool. With this contribution matching, there are concerns about the recommendations regarding ORPP including the cost of premiums as employers consider what the additional costs may do to their business and how that may impact jobs.
There are a number of details yet to be ironed out with the pending legislation to create the ORPP, which is intended to be introduced later in 2014.
Please feel free to contact us to learn more about ORPP and other retirement savings vehicles that may suit your goals. We're here to help so that you can focus on what you do best.
Depending on what stage of life you're in, planning for retirement may be something you think about frequently or something that rarely, if ever, crosses your mind. It is a topic that people between the ages of 50-64 feel the need to address with greater frequency. While some Canadians have been planning for this chapter of their lives for years, others are realizing, with regret, that they aren't where they hoped to be with their savings goals (if they developed any at all).
In a 2005 study by Ameriprise Financial called the New Retirement Mindscape, 5 key stages of retirement were identified. This study was conducted again in 2010 with findings revealing a sixth emotional stage in the retirement continuum. Respondents indicated in the latest study that they felt less hopeful and optimistic toward retirement. Given the economic downturn of 2008-2009, this response is not surprising.
So what are the six emotional stages?
Stage 1 is called "Imagination" and it occurs between 6 to 15 years before retirement. It is during this stage that people really starting thinking about what their life could be like in its next chapter. Those that have aging parents or kids in college or university may feel the need to delay this initial stage for a while.
What's isn't happening in this stage are concrete plans to determine how much money will be needed in retirement. Time for a call to action to address exactly how much is needed for retirement and to lay out a realistic roadmap for attaining this goal.
Stage 2 is called "Hesitation" and it occurs between 3 and 5 years before retirement. Economic anxiety causes the hesitation stage. People start to worry that what they want for their retirement might not be attainable based on the savings they've accumulated to date. It is during this stage that their readiness to seek help from a financial advisor comes into play.
This stage is a good time to really maximize retirement contributions and work with an advisor to explore practical and safe savings strategies.
Stage 3 is called "Anticipation" and it occurs approximately 2 years before retirement and then right up to the big day. During this stage, people are feeling more stable about their decisions and are coming to terms with what is realistic for their retirement. During this stage, people are wise to think about their income in retirement and how they will manage to live within their means while on a fixed income.
Stage 4 is called "Realization" and it occurs on retirement day and in the year following. It was formerly called "liberation" day, but given the lack of optimism in recent years about living a retirement of their dreams, people's views on it are somewhat muted.
Stage 5 is called "Reorientation" and it occurs between 2 and 15 years after the retirement date. It is during this stage where people try to get into a rhythm as well as a new sense of routine. As familiar patterns and routines develop, people become increasingly comfortable and their level of contentment improves.
Stage 6 is called "Reconciliation" and it occurs 16 or more years after retirement. As people age, there is a greater propensity for illness to set in and more friends and family pass away. Although still relatively content in this stage of retirement, feelings of stress about illness as well as anxiety as to how and who support them when physical challenges occur, creep into their thoughts.
It is never to early to start planning for a healthy and happy retirement. Working with a trusted advisor who can help you set up and maximize the benefits in an employer-sponsored retirement plan as well as a personal savings account is an important step in ensuring confidence during all the stages of retirement.
Please contact us to start the conversation. We're here to help so that 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.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.