As we approach the RRSP contribution deadline, employees are making some of the most consequential financial decisions of the year. But according to Mercer’s inaugural Mercer Retirement Readiness Barometer, Canadian employers should do more to influence these decisions, in order to ensure that their employees are financially secure, and on track for a dignified retirement.
The Barometer – whose annual findings use Mercer’s proprietary Retirement Readiness Analytics to measure the projected retirement age of Canadian Millennials, Gen Xers and Boomers – shows that Canadian employers must do more to help their workers achieve greater financial security.
Although retirement readiness varies from generation to generation, the Barometer is clear: Canadians need to begin to adopt a less conservative investment approach, maximize participation and gain greater access for personal savings through their workplace.
Otherwise, they risk leaving money on the table, and being forced to retire later - or not at all.
“The Canadian workforce is more diverse than ever – and different generations have different needs,” says Jillian Kennedy, Partner and Canadian Leader of Defined Contribution and Financial Wellness, Mercer Canada. “The Mercer Retirement Readiness Barometer will help employers gauge their employees’ retirement readiness, and gain deeper insight into their employees’ financial security.”
What matters most
Defined contribution plans are a critical source of retirement security for Canadians of all ages. But without taking on an appropriate level of risk with the proper investment mix, Canadians will find it difficult to achieve the level of asset growth they will need to build their nest eggs and retire comfortably.
Our proprietary datasets show that Canadians suffer from the classic retirement trilemma. They want, at once, asset growth, access whenever they want it, and assurance that they will have enough when they retire.
But these goals cannot all be satisfied at once, and without the proper information or incentives, many Canadians are not saving enough, or are invested too conservatively, leading, potentially, to delayed retirement.
If Canada’s workforce is to be financially well and able to retire at the age they desire, more must be done to encourage them not just to save, but to invest. In order to measure the retirement readiness of Canadian workers, Mercer has built three personas – prototypical figures representative of Canadian workers, their saving behaviour, incomes and assets – and gauged what employers can do to make them more retirement-ready.
Can millennials retire?
Millennials are just starting their careers – but our analytics show that they are not saving at the rate they will need to in order to retire. And achieving an adequate level of growth will be absolutely critical.
We estimate that a Canadian millennial – aged 28, with current annual earnings of $45,000 and with a total combined company and employer contribution of 6% to a workplace retirement program – will be retirement ready at age 70. This assumes they are invested in a short-term investment. Many millennials opt to invest conservatively – in low risk, short-term investments like a money market fund - especially if they are uncertain how long they will end up staying with their current employer.
In contrast, the same millennial who takes a long-term perspective by investing their workplace program money in a healthy mix of equities and bonds will be able shave off three years and retire sooner at age 67 – just by making a better investment decision today.
Savings rates are equally critical. The Barometer shows that a savings rate any lower than 6% total annual company and employer contribution means that retirement may be altogether impossible for a millennial.
Further, in order to achieve the traditional retirement age of 65, our prototypical millennial would need to increase their combined savings rate to 10%, starting today. This is not a realistic prospect for many members of this generation, who have more immediate financial priorities: paying down debt, managing student loans or buying their first home.
Did boomers truly luck out?
A baby boomer is late into their career – and they have benefited from several strokes of luck. We estimate that a Canadian boomer – age 60, with current earnings of $100,000, with a combined company and employee contribution of 10%-12% to their workplace plan – will be retirement-ready by 65-69.
But this estimate may not be true for all boomers. Beneath the strokes of luck, many boomers are struggling.
Unlike millennials and Gen Xers, boomers generally had access to defined benefit pension plans, where investment and contributions were both managed by the company. However, as DB plans closed and boomers began to enter DC plans, a real shift of mindset was required – and many boomers were unable to save enough money.
Further, changes by employers to nudge investors into less conservative investment vehicles, like target date funds, may have come too late for Boomers to benefit. Employers began to offer target date funds as default options in 2010. Our Millennial can benefit from this for his or her entire career – for our Boomer, it might be too little too late.
And even where these Boomers, like our Boomer persona, enjoyed every stroke of luck – where they were encouraged to invest appropriately by their employer, where they were encouraged to save enough money – they still find it difficult to retire at age 65. In light of these facts, it may be time to reconsider the ‘default’ retirement age.
Gen X – Is it too late?
We forecast that the average Canadian Gen Xer – aged 45, current earnings of $70,000, making a combined company and employee contribution of 10% - will be retirement-ready by 68.
With 20 years left before a traditional retirement age of 65, it would seem obvious to recommend that this Gen Xer increase their savings rates to meet their goals. However, if the Gen Xer wants to achieve the traditional retirement age of 65, they will find it difficult if they relied on increasing savings rates alone.
Our estimates show that even if they were to save an additional 3% every year for the rest of their career, this Gen Xer will only see their retirement readiness age move up by 1 year to age 67. In order to retire at 65, this Gen Xer must immediately raise their combined employee and company by 7% to a total of 17% per annum, and remain at that level for the remainder of their career.
Employers must act
These personas are based on realistic inputs, gleaned from our proprietary datasets –they are representative of the state of your workforce. What do they show? That while higher levels of savings are critical to the success of future workplace retirement programs, many different levers must be used together to improve retirement readiness.
Success is achievable, and accomplished through an increased focus on re-engaging employees through innovative and less traditional approaches that evolve with the change in generations. Allowing access to employee savings that promote debt re-payment, while the company contributes towards retirement, access to personal savings accounts through the workplace and guidance to prepare employees as they approach retirement are all steps to moving employees towards financial freedom.
Further, more must be done to address ‘gaps’ in the pension system. At present, certain low-fee investment vehicles are only available to Canadians through pension funds. But should a person lose access to that pension fund – whether through maternity leave, or switching jobs – their fees often abruptly increase, potentially adding unwanted years to a person’s working life. Mercer Invest Wise™ aims to help close this gap, by providing retail investors access to institutional-grade investment expertise - but this is only part of the solution to a systemic problem.
“While everyone’s circumstances are different, our data shows that employees need a combination of both higher asset growth and levels of saving early in their career to achieve financial security,” concludes Kennedy.
About the Mercer Retirement Readiness Barometer
The Mercer Retirement Readiness Barometer measures the age in which three different personas (millennial, Gen-Xer and baby boomer) can comfortably retire based on their participation within an employer-sponsored DC plan and benefits provided by the government (like CPP/QPP/OAS).
All three personas contribute the same rate annually to their company plan over their course of their career. In retirement, income will be sourced from their company plan savings as well as government programs such Old Age Security and Canada/Quebec Pension Plan. The retirement readiness age is based on the age they can replace 70% of their income in retirement.
Unless otherwise noted, the following assumptions were used to calculate the returns each investor earned:
The Capital Accumulation Plan (CAP) balance is used to purchase an annuity at retirement. Annuity prices determined based on the CIA guidance for the medium duration illustrative block. Results will vary.
The total savings rates of 10% that is used to anchor this analysis is based insights from Mercer’s proprietary defined contribution plan design database which includes plan design data from over 400 plans across a wide array of sectors and industries.
About Mercer Canada
Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.ca. Follow Mercer on Twitter @MercerCanada.