'We probably haven't done the best job of helping people understand how to decumulate optimally,' says SVP of investment solutions at SLGI
Planning for retirement is changing and not necessarily for the better.
As Oricia Smith highlights, with plan members are living longer, many aren't financially prepared for retirement, pointing to Sun Life Global Investments’ data painting a grim picture.
“About 90 per cent of plan members want regular income, but they also don’t want to lock in all their savings,” noted Smith, president of SLGI Asset Management and senior vice president of investment solutions for Sun Life Canada. “Forty per cent of Canadians worry that they’ll run out of money, while about 50 per cent don’t have financial advice in retirement.”
Chief to this, the traditional notion of retiring at 65 is no longer expected as rising costs, uncertain investment returns, and a decline in defined benefit (DB) pension plans have made financial security in retirement more difficult to achieve.
“As an industry, we probably haven’t done the best job of helping people understand how to decumulate optimally,” said Smith. “There is a level of complexity with respect to accounts, Registered Retirement Income Funds (RIFF) and Life Income Funds (LIF) minimums, asset mixes in retirement. These are all decisions that Canadians are left to make on their own.”
With workplace pensions dwindling, employers are in a unique position to support their workers, especially as employer-sponsored group savings plans have become a key tool in retirement preparedness, particularly as generational attitudes shift toward financial security.
“Group savings plans really do play a crucial role in retirement savings for Canadians,” emphasized Smith, adding plan sizes were likely previously hesitant to engage in decumulation planning for their members.
“We're seeing that changing a little bit so there's also this kind of layering in terms of the impact on retirement planning and personal health. We’re seeing that employers are increasingly recognizing their role in assisting employees with retirement savings,” she said.
Currently, roughly 9 per cent of employees are covered by DB pension plans compared to about 80 per cent in the public sector. The private sector employs three times as many people, “and most of them don’t have access to those kinds of pensions,” said Smith.
Consequently, many Canadians are left to navigate the complexities of retirement planning on their own, facing decisions about savings withdrawal rates, asset allocation, and risk management.
According to a recent CIBC poll, 66 per cent of future retirees surveyed say that recent economic changes, including rising inflation and an increased cost of living, have made them adjust their retirement plans.
Additionally, more than 70 per cent anticipate working in their retirement, either through a phased or semi-retired approach.
Innovations lead to retirement solutions
With so many Canadians facing financial uncertainty in retirement, institutions are developing new products designed to help retirees manage their income more effectively.
Smith pointed to is Sun Life’s MyRetirement Income as one innovation, a product designed to provide automated income solutions for plan members in retirement.
“It’s designed to really simplify the retirement journey so that plan members only need to make one decision: the age they want their money to last until,” Smith explained, acknowledging that sixty per cent of Sun Life members have target date funds because it's the primary default option in group plans.
“It’s like a target date fund, but designed for in retirement,” she added, highlighting it’s also available for RIFFs, LIFs, and non-registered accounts, designed to fit the minimum and maximum prescribed by legislation.
“It makes transitioning from saving to drawing income much easier,” Smith said. “And it also ensures that income remains resilient, which is something a lot of traditional growth-focused investment products don’t address.”
Smith expects more innovation in the retirement space, particularly in decumulation strategies.
“I do think a lot of the future innovation could be in decumulation, building portfolios for decumulation,” she emphasized. “Looking at how to draw down optimally and stress testing the portfolios differently for Canadians, including life expectancy.”
Smith noted when her team stress tested a typical 5 per cent employee and 5 per cent employer retirement plan, approximately 44 per cent of the retirement income came from investment returns post-retirement.
“That’s even more than what came from savings during their working years,” she added.
Smith also acknowledged that automatic payroll deductions from employers have also proven to be an effective way to build long-term retirement savings.
“Having those automatic contributions doesn’t mean that you necessarily forego flexibility,” she explained. “You can still dial up or dial down contributions depending on what’s happening in your life. But having that automatic system removes the temptation to spend money now instead of saving for retirement.”
Education is another area where employers can play a crucial role. Many employees don’t fully understand their workplace retirement benefits or how to optimize their savings.
“To me, it’s important for members to understand the benefits of their plans so they can fully utilize their employer matching contributions,” Smith said.
“Plan sponsors are continuously looking for ways to provide employees with educational tools and resources to make better decisions about their retirement.”
