Providers need to show plan members the estimated retirement income they are building within their group savings plan, making it easier for members to assess the fit with their retirement vision. If that outcome doesn’t align with their vision of retirement, they’ll need information, tools and support to help them close the gap. Studies show most members still don’t have a sense of how much they’ll need to provide a reasonable annual income throughout their retirement—a retirement that is likely to be longer than it’s been for any previous generation. According to a Society of Actuaries report from 2006, a healthy 65-year-old has a better than 90% chance of living to age 70 and a better than 75% chance of living to age 80. More than 33% of those who are healthy at 65 are likely to see age 90, so many plan members will need a retirement income that lasts for two or three decades after they leave the full-time workforce.
Longevity risk—the probability of outliving retirement savings—means plan members need to make a concerted effort to save more. They also need to take lifestyle choices into account long before and even after retirement. A 2007 study by the Organization for Economic Co-operation and Development ranks Canadians among the worst savers. On average, Canadians put away a meagre 1.23% of disposable household income. More than 90% of Canadians who file taxes have unused RRSP room, and more than 33% of those who have an RRSP have made a withdrawal from their plans.
If that’s the reality of how plan members save (or don’t), consider what lies on the other side of the divide: employees want to retire early, and they want more from their retirement years. As they’re apt to live longer and to be in better health, they expect more travel and recreation to be part of their retirement lifestyles. In truth, according to the Society of Actuaries, two-thirds aren’t saving enough to simply sustain their household expenses.
While the clash between plan members’ hopes and their likely outcomes doesn’t offer an encouraging starting point, it does offer an important wake-up call. For those who act quickly to make adjustments, the gap between expectation and outcome is far from insurmountable.
Helping plan members build greater awareness of their own reality continues to be the most significant challenge for the retirement savings industry. Boosting comprehension requires providers to present information the member can easily understand, and then apply. Simply showing a member the total asset balance he or she is likely to have at retirement isn’t helpful for most people. They can’t easily relate this sum to a future stream of income. An updated estimate of annual retirement income, tailored to each member, is a vital piece of helping members understand where they’re really heading.
Presented with a personal estimate, plan members may suffer some initial “sticker shock,” so providing good support is just as critical. Members’ estimates should be accompanied by tailored strategies to help each individual find a workable solution that can help close any gap. Again, clarity is key—simple tips, along with likely results, will be necessary to demonstrate the range of options.
At this point in the development of our industry, and of the Canadian retirement savings environment, it’s time to focus on effective solutions. Providing a clear view in tandem with strong support to help plan members see across the great divide—then find their way to the other side—is our industry’s most important goal.
Barry Noble is the vice-president, distribution, group savings and retirement solutions at Manulife Financial.
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