This is how much Canadians need to retire comfortably

Without a proper savings plan now, employees would be forced to postpone retirement

BY Rachel Ranosa 08 Sep. 2020

The average Canadian employee will need 11 times their final pay if they are to retain their standard of living in retirement. Without a proper savings plan now, many would be forced to retire at age 70, a new report from professional services firm Aon suggests.

“The retirement readiness gap is real,” said William da Silva, senior partner and director of Retirement Solutions at Aon in Canada.

Retirement income adequacy refers to the amount of savings required for employees to maintain the same spending power before and after they leave the workforce. It factors in changes in savings, taxes and medical expenses among other conditions.

Apart from the employee’s personal savings, a significant portion of retirement income comes from government pension and employer-led retirement savings schemes.

From age 25, working Canadians should already have at least 16% of their annual pay going towards both workplace and personal retirement savings plans, Aon said.

Without personal savings, for instance, the average employee – age 45 with annual earnings of $60,000 and a retirement savings plan with a 5% employee contribution and 100% employer matching – would likely “come up short against the 10.9 times pay goal,” analysts said.

By Aon’s calculations, employees who are falling behind would have to postpone retirement to age 70 to enjoy the same net available income after retirement. Otherwise, they would be forced to lower their standard of living by an estimated 30% to compensate for the “savings shortfall”.

“This is an opportunity for employers to ask the right questions,” da Silva said.

Are contribution levels appropriate and designed in alignment with the plan sponsor’s objectives?
Are employees equipped with resources to manage their finances and plan for their retirement?
Do employees understand the impacts of medical cost inflation and other post-retirement expenses?

“Clearly, there’s a need to look both at the substance of workplace retirement programs and at the ‘soft’ levers of education and information,” da Silva said.

But retirement income adequacy isn’t just a question of how much is enough – but how much is enough for whom, as OECD economist and pensions expert Pablo Antolín-Nicolás pointed out.

Every Canadian is facing unique circumstances, and how much they should set aside “ultimately depends on their own goals and resources,” said Rosalind Gilbert, senior actuary and associate partner, Retirement Solutions, Aon.

“Canadian employees have clear expectations that their employer should provide increased support for their overall financial well-being, and capital accumulation plan sponsors are focusing on areas that are well aligned with this objective,” Gilbert said.