New data from Towers Watson shows that it’s going to take Canadian workers more time to build a comfortable retirement nest egg than in years past.
The company’s Defined Contribution (DC) Retirement Age Index, released today, measures the effect of changes in capital market returns and annuity purchase prices on the potential retirement age of a Canadian worker in a benchmark DC plan.
For example, if a DC plan member who was 60 years of age today 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 68.5.
“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”,” said Michelle Loder, Canadian DC business leader at Towers Watson.
According to data in the Index, the benchmark plan member who contributed to the plan for 20 years and retired at age 60 on December 31, 2007 experienced an annualized average investment return of 7.2%. In contrast, a member who contributed for the same number of years but who retired on September 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,” explained Loder.
John McIntosh, Towers Watson’s Canadian plan design issue leader added, “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.”