'We can't just arbitrarily put clients in aggressive investments to make up for the shortfall,' says financial planner.
Canadians working today could be headed for a serious financial shortfall in retirement. They are carrying debt for longer, saving less, and lack the pension access of previous generations. One retirement expert highlights a sobering lack of education and some behaviours creating this deficit.
Tanya Staples explains that the two pre-retirement behaviours most often associated with effective retirement planning , are saving and budgeting for the retirement years. So, without the support of financial planners, plan sponsors, and employers, “how are Canadians to know that those are the two behaviours they should be engaging in now that they are more responsible for their own retirement? There's real value in that conversation,” says Staples, a Professor of Financial Planning at Conestoga College, who also holds a CFP® designation and is a PhD Candidate in Personal Financial Planning at Kansas State University.
“What we’re seeing is a much longer borrowing period and a much shorter retirement savings period,” she adds, noting this creates a fundamental mismatch in financial preparedness. “By default, there could be a deficit. There is insufficient savings to last a much longer retirement; we can't just arbitrarily put clients in aggressive investments to make up for the shortfall.”
While the major trend has been the reduction in defined benefit (DB) pension plans being replaced by defined contribution (DC) plans or RRSP plans, there’s also been a reduction in pension plans altogether, with fewer Canadians having access to them. That said, however, the pension plan coverage has increased for women, notes Staples.
The industry continues to see a decline in employer-sponsored pension plans which has essentially transferred the onus of retirement planning onto individuals, leaving to a reduction in plans altogether. In the private sector, only roughly 9 per cent of Canadians have access to a defined benefit (DB) pension plan. “That’s less than 10 per cent, which I think is a bit scary for many Canadians.” While there are fewer pension plans,
Additionally, the financial risks Canadians face in retirement are becoming increasingly pronounced. For one, the growing burden of debt is a significant factor. “One of the biggest risks is outliving your savings,” Staples highlights. Historically, people borrowed during their early years, saved during their peak earning years, and then relied on those savings in retirement. But that trajectory has completely shifted.
Similarly, consumer indebtedness is also a significant barrier. Staples points to the culture of convenience and instant gratification, explaining that product delivery services and food delivery apps has exacerbated the issue. She explains the purchasing convenience, especially with credit cards, has distanced or desensitized Canadians to spending to where there is no sober second thought before the purchase is made. That’s why she believes in investing for better education around managing debt. This is where employers and financial planners can play a significant role.
While there’s not going to be a one-size-fits-all solution, Staples emphasizes having a comprehensive financial education program. Employers could offer a mix of online, in-person, and personalized financial education, along with tools that require employees to engage actively with their retirement planning with a tailored approach. “The research definitely says it’s both knowledge and skill that needs to be developed for Canadians to make better financial decisions,” she says.
She also points to a promising model for pension reform like hybrid plans. These combine basic DB benefits with additional savings options, such as group RRSPs or DC plans. “What Canadians have told pension plans is that they want something indexed to inflation, something that provides the basics but guarantees income for life,” she says.
Not all is bleak though as she highlights the government’s recent enhancements to the Canada Pension Plan (CPP) as a bright spot. “We’ve seen the CPP enriched, providing a richer benefit,” she says. The introduction of a second-tier CPP benefit for those earning above the Year’s Additional Maximum Pensionable Earnings (YMPE) offers additional support, though it requires increased contributions. Additionally, the benefits under or at the YMPE have also witnessed contribution increases, based on increased percentages, she explains.
That said, CPP and Old Age Security (OAS) aren’t enough either, asserts Staples, comparing them to “bare, essential day-to-day expenses. It’s definitely not going to provide a rich retirement.”
That’s why Canadians will have to come to terms with the realities of financing retirement. “For the most part, there’s only four things you can do. You can work longer, save more, hope to earn a higher rate of return, but that's difficult, because then you run the risk of getting outside your risk profile and your comfort zone. Or take less.”
