Securing a comfortable retirement is going to take Canadian workers more time to achieve, according to the Defined Contribution (DC) Retirement Age Index released Tuesday by global professional services firm Towers Watson.
Today, if a 60-year old DC plan member wanted to match the retirement benefits of a benchmark DC member who retired at age 60 at the end of 2007, after 20 years of contributing, this plan member would need to work until the age of 68 and a half — a remarkable extra eight and a half years.
“From a retirement planning perspective, the Index results really demonstrate the risks that DC plan members face in trying to juggle long-term investment assumptions with what we call “end point sensitivity,” says Michelle Loder, Canadian DC Business Leader at Towers Watson said
End point sensitivity refers to the impact that the timing of a decision to retire can have on the funds available in retirement due to changes in both investment returns and annuity prices. According to data in the Index, the benchmark plan member who contributed to the plan for 20 years and retired at age 60 at Dec. 31, 2007 experienced an annualized average investment return of 7.2%. In contrast, a plan member with the same length of contribution history, but who retired on Sept. 30, 2012, experienced an average return of 6.3%.
“0.9% may not sound like much, but it actually can translate into tens of thousands of dollars that will not be available to the second plan member to secure in retirement income through an annuity. That means the plan member needs to work longer to make up the difference, contribute more during that delay, or be satisfied with less income than their counterpart who retired in 2007,” notes Loder.
“DC plan members need to keep a long-term focus, and periodically review and adjust their levels of contribution and investment choices — or they may find themselves unpleasantly surprised,” says John McIntosh, Towers Watson’s Canadian plan design issue leader.
Findings from Towers Watson’s Retirement Attitudes Survey show that a majority of employees see room for improvement in their employer’s retirement communication and planning tools. Overall, less than 40% of responding workers think their employers are doing a good job of providing retirement tools and information. For employees nearing retirement (age 50 plus), the number decreases to 30%.
Canadian employers, however, have been slow to respond to the request for help, citing cost considerations or plan design restrictions. But, as McIntosh says, “Without providing education and the necessary tools, employers run the risk of having more ‘hidden pensioners’ — retirement-ready employees who are working out of necessity rather than by choice. Employers need to find a balance between managing plan costs and the risk of employees not being able to retire.”