Every day, almost 1,200 people turn 65 in Canada. That means that more than 400,000 Canadians, on average, will reach retirement age every year between now and 2030, according to Statistics Canada.
These numbers have profound implications for group retirement plans across the country, not the least of which is the fact that the baby boomer generation has moved the retirement savings discussion from strategies for accumulating funds to methods of establishing solid retirement income.
Of course, shifting demographics is just one reason why the topic of retirement income has come to the fore. Market volatility in recent years has hurt savings and eroded confidence. Concern lingers around the reliability of govern-ment income programs such as the Canada Pension Plan. And Canadians are living longer, healthier lives, increasing the pressure to build long-lasting retirement income.
Given all of this, retirement income worries may be keeping employees up at night—even those who are still several years away from leaving the workforce. But a financially secure retirement is achievable for most Canadians. In order to get there, plan members need to be aware of some hidden risks. And that’s where plan sponsors can lend a hand. Providing members with access to the right information and the right investment options will go a long way
to ensuring that members can maintain their lifestyles well beyond retirement.
Don’t abandon equities
As recently as five or six years ago, Canadians approaching retirement were quite happy with equity markets. Returns were strong, and most assumed that by investing heavily in equities, they’d accumulate more than enough money to retire comfortably.
Today, investors are of a different mindset. Market shocks have set retirement savings back considerably, and many investors have responded by shifting away from equities into more conservative investments such as fixed income products. Unfortunately, in solving one problem, this may be creating an even bigger one.
There is certainly nothing wrong with taking a conservative approach to investments, and investors are often well advised to reduce equity exposure as they approach retirement. But those who abandon equities completely are severely limiting their return potential, with potentially serious consequences on the amount and duration of their retirement income.
In fact, if interest rates rise, the current low returns from bonds could quickly turn negative. Meanwhile, dividend yields from high-quality equities are currently very attractive. For example, Canadian stocks yielded nearly a full percentage point more than Canadian bonds in June (see Figure 1). Plus, equities can provide significant long-term growth, which can help offset the risk of rising interest rates and inflation. This potentially improves the likelihood of stretching retirement savings over a longer period of time.
Look across the globe
Not only is it wise to maintain some equity market exposure both before and after retirement, it’s also wise to think beyond Canada’s borders.
For years, Canada has enjoyed strong commodity prices, a resilient stock market and a healthy financial system. But while some plan members may feel that investing close to home offers a measure of protection from global economic events, the world is simply too interconnected for that strategy to work.
If anything, Canada may be due for a correction. Canadians now spend more of their disposable income than Americans on loans, credit cards, home equity lines and other debt payments. As Figure 2 illustrates Canadians’ personal debt is now roughly one-and-a-half times their disposable income, which is a clear risk to economic stability.
In addition, an overheated real estate sector could be set to cool down in the near future. Meanwhile, the International Monetary Fund has pegged emerging markets such as China, India and Brazil to grow at well over twice the pace of Canada and the U.S. over the next five years (see Figure 3).
The best retirement income strategy is one that encompasses multiple asset classes and geographic regions. Plan sponsors can help by equipping employees with access to a complete range of retirement income options, including traditional annuities and funds, as well as more sophisticated solutions such as high-yield and global bonds, equity income and international equities.
Take action
While plan sponsors can offer exposure to global and domestic equities for plan members, how else can they contribute
to employees’ financial security—both before and during retirement? Here are five ways.
1. Take ownership of retirement income
Plan sponsors may not have an explicit responsibility to counsel their employees on retirement income, but anecdotal evidence shows there are compelling reasons to do so. First, financially secure people simply make better employees. Those who receive help from their employers to manage their personal investments feel more highly valued, tend to be more productive and loyal, and are also more likely to be brand ambassadors.
On the flip side, there are potential liabilities if employees do not receive guidance and experience poor retirement outcomes as a result. No employer wants to attract negative publicity or risk a legal challenge.
2. Communicate the issues clearly
Research from Sun Life’s January 2012 Bright Paper shows that employees who most urgently need to be planning their income options—those age 57 and over—find the information they receive about retirement plans too confusing. Some of the most successful plan sponsors are those that take the time
to communicate differently to the various age groups within their companies in ways that are clear and relevant to their concerns.
For example, many employees have a low level of awareness of the risk of outliving their savings, and that’s an issue workers in their 50s and 60s need to be made aware of. Employees should ask themselves how much money would be needed to enjoy their retirement and then compare their current savings to the target. From there, employees who are spurred to action can ask for the individual advice they need to make an informed transition into retirement.
3. Offer professional financial advice
Retirement income planning is not a static exercise. Variables in life, career, health and the markets can all impact an employee’s financial outlook from year to year. But employers can help to prepare employees for this transition to retirement by bringing in expert support services such as pre-retirement seminars.
Anecdotal evidence indicates that plan members have a tremendous appetite for information, one-on-one support and even referrals for personalized advice from a professional financial advisor. Almost all plan members can benefit from a realistic assessment of their finances and a clear-cut retirement income plan that can be reviewed and adjusted regularly as circumstances change.
4. Provide a full range of retirement income options
Because everyone has a different retirement plan, plan sponsors need to align with a provider that offers a full range of income options. That means conventional solutions such as annuities and fixed income funds, as well as products that can provide alternative forms of income, such as dividend-paying equities, real estate income or other sources of investment cash flow.
This added diversification has the potential to increase income levels during retirement, extend income for a longer period of time and reduce risk along the way. Finally, investment options should make it simple for employees to select a level of cash flow that reflects their current income needs and adjust it up or down as their needs change over time.
5. Be open to flexible arrangements
A generation ago, retirement was an all-or-nothing event. But with higher living costs, lower rates of savings, longer life expectancies and technology that allows people to work from just about anywhere, phased-in retirement is a growing phenomenon. If employees can supplement their retirement income with part-time work, it reduces the need to draw from their savings, which means those savings can last longer.
Think about the benefits for your company: a large cohort of retirees can cause a serious talent drain, but a flexible program that allows for more gradual transitions into retirement can make things more manageable for everyone. And if employees leave the company? Having a retirement plan with rollover options makes it possible for them to take their investments with them and keep their income strategy intact.
Markets have changed. Retirement has changed. And the responsibilities and opportunities facing group retirement plan sponsors are changing along with them. It will always be important to help retirement savers build strong nest eggs during their working years, but plan sponsors cannot forget to make sure employees enter the next stage of their lives with a solid retirement income strategy.
Sadiq S. Adatia is chief investment officer and a portfolio manager for Sun Life Global Investments. sadiq.adatia@sunlife.com