The gross income replacement levels for a typical capital accumulation plan have decreased by more than 10 per cent during the past 11-year bull market, according to a report by Eckler Ltd.
After the financial crisis in late 2008 the economy rebounded, but more than a decade of strong stock returns weren’t enough to markedly improve the amount of income workers will have in retirement, noted the report. It pointed to low interest rates and increased longevity as the main drivers that offset gains from a prolonged bull market.
However, over the last year, strong stock returns did help push the gross replacement rate of a typical male CAP member up two per cent to 58 per cent, while the rate rose one per cent to 56 per cent for a typical female CAP member.
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The report found having a more aggressive investment strategy has been more lucrative over the past 11 years. For instance, an investment strategy with 80 per cent allocation to equities, delivered a gross replacement rate that was five per cent higher than a conservative investment strategy with 30 per cent allocation to equities, over the same time period.
Relying on strong market returns shouldn’t be the only tool in plan sponsors toolkit, advised the consulting firm. Looking beyond stock market fluctuations, Eckler recommended that plan sponsors highlight what’s under plan members’ control, including: whether to participate in company-sponsored savings programs; the amount they contribute to these programs; how much they need to save outside of the company offering; and the age at which they choose to retire.
Read: 2019 CAP Member Survey: Helping each generation on their retirement journey