Paying off debt helps younger workers with retirement planning, says report
If employers provide workers with 100% matching contributions for their retirement savings, they can help workers retire a couple of years early, according to a Mercer Canada report.
As an example, a 30-year-old worker with $30,000 of personal (non-mortgage) debt with access to 100% matching contributions from their employer could retire two years earlier — with an additional $250,000 in retirement savings at age 65 — “if they pay off debt early rather than focusing on retirement savings from age 30,” said Mercer.
Many workers in the education sector are looking to continue working even past their retirement age, as just 17% say they are ready financially, according to a previous report.
How important is getting out of debt?
The Mercer report also noted that the same worker could retire one year earlier with $125,000 more in savings if they focus entirely on paying off debt within 10 years, before shifting their focus to saving for retirement.
“Many people think that if they have not started saving for retirement by the time they are 40, they have failed,” said Jillian Kennedy, partner and leader of Defined Contribution and Financial Wellness at Mercer Canada.
“[But] if you are diligent about paying down debt as a priority, then later focus on saving for retirement, you may still have time to accumulate savings and you may actually end up in a better position at retirement. Paying off debt can be effectively saving for retirement.”
The analysis assumes that the 30-year-old worker earns $70,000, has 5% of their income to apply either to paying down debt or saving for retirement, and the interest rate on their debt is higher than the expected rate of returns of their investments.
Increasing levels of financial stress
Most traditional workplace retirement programs only give employees access to pension plans that require savings to be locked in and inaccessible until retirement age, and this can make paying down debt more difficult and retirement feel unattainable, Mercer noted.
“As a result, we are seeing increased levels of financial stress reported by employees across all earnings levels up to $200,000 according to Mercer’s 2023 Inside Employee Minds Survey,” said Mercer.
However, some workplace retirement programs have started to evolve and recognize the importance of supporting financial wellbeing and retirement readiness with a more personalized approach, it said.
“For example, allowing employees to direct their own savings to a Tax-Free Savings Account (TFSA) or non-registered account where funds can be withdrawn for debt re-payment, while still directing matching contributions from the employer to a traditional pension arrangement. Employers adopting plans with this type of flexible design are noticing higher employee engagement and financial literacy which is helping Canadians in their day to day lives.”
While many Canadians are saving money for retirement, many seem to be doing so without a formal plan, according to a previous report from IG Wealth Management.
Why should an organization prepare staff for retirement?
Offering retirement savings plans can help employers fight labour shortages, Meghan Murphy, vice president and team lead for life events at Fidelity Investments, said in a Business.com article.
Otherwise, employees might keep working for your company past typical retirement age just to earn a paycheck, which hurts your chances of hiring new employees who will bring fresh ideas to the table, according to the report.
Also, many retirement plans offer vesting schedules, which can benefit employers.
Vesting schedules are tied to contribution matches and ensure that employees who want all of the money their employer has contributed to their account don’t immediately take their money and run. And many businesses use vesting schedules as an incentive for their employees to stay with the company, said Augelli in the report.