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.
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.
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.
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.
In the past, I've blogged about the critical issues facing Canadians when it comes to be debt management and saving for retirement. The current challenges we face are not insurmountable, but the problems relating to apathy toward digging out of debt and having money saved for a rainy day don't seem to be headed toward resolution any time soon.
The statistics are staggering and somewhat disturbing:
Aside from what I've written about, there is a plethora of information on the Web about financial literacy and the importance of positioning Canadians for success when it comes to managing their finances. Countries like the U.K, Australia, New Zealand, the U.S. and Canada have developed national financial literacy programs. Increasingly, high schools are making financial literacy a mandatory part of the educational curriculum.
What about the workplace? Since most adults spend a bulk of their day working at their respective jobs, employers have the ability to play a key role in influencing employees about the importance of financial literacy. At present, it appears that attention on financial literacy in Canadian workplaces remains somewhat overlooked. Workplace financial literacy programs support employees to develop skills relating to their pay as well as managing for retirement. In turn, employers see increases in employee engagement and productivity because employees are less stressed and more present (physically and mentally) when at work. In the Report of Research Finding relating to personal finances and worker productivity, employers found that when employees were financially distressed, they were less committed to their company and less satisfied with their pay. In addition, employees stressed about their finances spent an average of 20 hours a month of work time trying to solve these problems.
So, what can employers do to beef up employees' financial literacy awareness? Here are some basis tips that cover helpful approach worth considering:
For more specific ways to incorporate financial literacy programs in your workplace, please contact us. 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 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.