Working longer is quietly becoming the default solution to not saving enough for retirement.
Employers are starting to realize this, and they’re getting nervous. It may suit employees to remain on the job longer, but not necessarily their companies. For this and other reasons, expect to see employers being much more proactive about helping their people understand how ready they are for retirement.
Canadians have traditionally picked the age at which they wanted to leave the work force and then adjusted their lifestyle to match their retirement savings, said Jeff Kissack, a senior retirement consultant at Willis Towers Watson. “I think we’re going to see in the next 10 to 20 years that people won’t do that,” Mr. Kissack said. “They’re not willing to live on less and cut back their lifestyle. They’re just going to work longer. That’s different from how we’ve thought in the last decade or two.” Willis Towers Watson regularly surveys workers about their benefits, including those related to retirement saving. Mr. Kissack said the number of Canadians in the survey who estimate they would retire past age 70 has gone from 5 per cent four years ago to 21 per cent now.
The later retirement trend is reinforced by some analysis that Willis Towers Watson has done on client defined-contribution pension plans, where retirement savings are based on the returns of your pension investments and not on your salary and years of service (as with a defined-benefit pension). Mr. Kissack said many DC plan members are in a position where they will only be able to retire with a sufficient after-tax income when they are in their early to mid 70s.
Later retirement actually makes a lot of sense at a time when people are living and staying active longer. Regardless of their finances, many will choose to work longer for the mental stimulation and social interaction. Some employers will see value in keeping older workers on, but others will not. For them, the challenge is to encourage better pension outcomes so people feel they can retire at the usual age.
It’s not just later retirements that worry employers. There’s also a risk that employees will blame them for not providing the pension support needed to retire well. There have been a few legal cases in the United States where employers have been sued for offering DC pension-plan investing options at what were seen as excessively high fees. Low fees are a foundation of effective investing and should be a given in the sort of products used in pension plans.
Statistics Canada reports that just over 38 per cent of workers had a pension plan at work in 2014, most of them in defined-benefit plans. But DB plans are losing favour because of the cost to employers of keeping them properly funded, while the number of people in DC plans grows. It’s the retirement outcomes from DC plans that are of particular concern to employers.
Mr. Kissack said a company with a DB plan can manage the age of its work force by offering early-retirement incentives that let employees leave with a full or nearly full pension. With DC plans, employers have to be much more diligent to ensure people retire somewhere around age 65.
Employers can do this by contributing more money to pension plans on behalf of employees, providing better lineups of investment products for the DC pension and improving communications to employees. For example, Mr. Kissack said, companies could provide their workers with statements showing at what age they will be able to retire based on their current pension savings.
Improvements such as these would be a win for all DC pension plan members. DC plans are a black box – you pour money in over a career with no idea what kind of retirement income you’ll have. The stats showing DC plan members headed to retirement in their 70s highlights this problem.
Of course, workers need to help themselves, too. To start, read your pension plan statements and figure out the age when you can retire with enough money to deliver the annual income you need. Can’t make sense of the numbers? Buy a retirement consultation with a financial planner.
Think you’ll work to age 70 and beyond, whether for the income or to keep busy? Gauge your company’s interest in having you remain in your job and consider your consulting options. Working longer is a solution to not saving enough for retirement, but don’t expect your employer to buy in.
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