The one-year anniversary of the COVID-19 lockdowns fast approaches. It has been quite the year and much has happened and we’ve seen the emergence of unsettling trends (the pandemic continues to take a toll on the mental health of many Canadians). According to this fall 2020 survey from Manulife, the financial health of many Canadians has degraded as the pandemic wears on, 51% of Canadians are dipping into their emergency savings or increasing credit card balances
Around the same time a CIBC survey found that the pandemic has impacted Canadians’ savings and their anticipated lifestyle in retirement. Out of those surveyed, four out of ten people are worried that COVID-19 will affect their retirement savings and plans, and 23% have not been able to contribute to their plans since the beginning of the pandemic.
While we did not conduct a formal survey, we observed similar trends with our clients this past year. Employers continue to reach out looking for guidance and tools to help assist employees with their mental health and financial well being. For clients with a retirement savings program set up for their employees, our reporting shows an increase in the use of available tools (retirement calculators, building financial plans, etc.).
The number of employees seeking help and utilizing the tools has grown compared to prior years. In some cases, usage of the website on a per plan member basis has more than doubled compared to 2019. This simply reinforces the trends noted in the surveys: Employees have finances on their mind more than ever.
In a ‘normal’ year, many clients were often interested in coordinating employee education sessions with the RRSP deadline because the topic of retirement planning becomes front of mind during tax season. It is easier to think about retirement planning when so many headlines, news clips, and marketing efforts are talking about the subject. The assumption was that employees would be more receptive to the topic of retirement planning and overall financial wellness compared to other times of the year.
The pandemic has put these matters front of mind throughout the entire year. Now is an ideal time to help your employees think about the big picture when it comes to retirement planning. If an employee can strategize and build a plan for themselves during one of the most challenging times on record, they will get the hard work out of the way. If and when we return to ‘normal times’, they just need to follow the road map they have created for themselves and monitor and adjust where needed.
Common Questions about Retirement
Employees often wonder how much they’ll need to save for retirement. The answer depends on what they want their retirement to look like. How much income they need is entirely dependent on the person and their planned lifestyle. How much total retirement income do they really need? The consensus from financial planners and industry experts is that a person will want to replace 60% to 80% of their pre-retirement income during retirement.
The next obvious question is how much money should an employee need to have on hand to generate that kind of income? For an age 65 retirement, it is common to use a ten to one ratio of assets to income. Meaning those hoping to have income of $50,000 a year will need to have $500,000; $75,000 will need savings of $750,000; and so on. Looking at it the other way, if you reach retirement and have managed to build your RRSP up to $250,000 do not expect to draw an income of more than $25,000 or else savings will quickly erode.
While geared towards a US audience, this CNBC article references a Fidelity Investments viewpoint that notes a similar requirement of 10 times your income by age 67. Perhaps more importantly, these articles also provide general savings milestones that a person would want to target along the way to retirement:
By age 30: the equivalent of your annual salary saved; if you earn $55,000 per year, by your 30th birthday you should have $55,000 saved
By age 40: three times your income
By age 50: six times your income
By age 60: eight times your income
By age 67: ten times your income
They use a benchmark of saving 15% of earned income beginning at age 25, so those who find themselves starting later in life will need to adjust accordingly. Ideally these savings would be held directly in an account intended specifically to fund your retirement, such as an RRSP or pension plan.
In Canada we have more tools in our tool kit, including the flexibility of Tax-Free Savings Accounts (TFSAs) that could also be used to provide tax free income in retirement. Owning a home, while not a liquid asset by any stretch, has also helped fund retirements for those who had to prioritize their mortgage during their working years. Retirees can downsize and move into a smaller home or tap into the equity value of the property to help generate income. And lastly, as Canadians, we have the luxury of government programs such as the Canadian Pension Plan to help lower the burden of what we need to save ourselves. While the benchmark consensus seems to be ten to one asset to income ratio by retirement, we have a number of paths that could be combined to help a person reach their target.
When it comes to retirement planning, the earlier your employees can begin taking the steps to reach these savings goals, the higher likelihood they will have of achieving them. As the pandemic has shown us over the last year, the best laid plans can often get derailed through no fault of the individual. But having an overall plan and a strategy in place is the most important component of retirement planning. It allows us to make changes along the way and provides the foresight that your employee’s planned retirement lifestyle may need to be adjusted when savings levels change.
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