Why old savings standards for CAPs just don’t cut it anymore

Canadians looking to replace their working income with benefits from capital accumulations plans and the government are facing a grim reality.

Indeed, pre-retirement income replacement from those two sources sits at 55 per cent for Canadian women and 57 per cent for men, according to Eckler Ltd. income tracker.

Worsening the situation, returns from equity and bond markets have been marginal of late, with annuity rates dropping as well. As well, the systems currently in place to provide retirement income were built in a different interest rate environment and, at the same time, longevity has been on the rise, exacerbating the issue. In this new normal, previously established savings goals won’t be enough to support viable levels of income, noted the research.

Read: Feds urged to raise contribution limits for DC pension, RRSP savers

It said, in order to tackle the problem, plan sponsors have to face the fact that it exists. In addition, they have to convey the message effectively to plan members. “Increasingly, employees are the ones responsible for making a host of financial decisions about their retirement savings and must bear the consequences of those decisions.”

Eckler’s income tracker uses the assumption that plan members are saving 10 per cent of their income to calculate their average ability to replace it.

While back in 2006, Canadian men and women were both able to replace more than 80 per cent of their pre-retirement earnings by saving 10 per cent, that’s been on a steady decline ever since. That 10 per cent simply isn’t doing the trick, the research noted, and has to be revisited.

Read: 2019 CAP Member Survey: Helping each generation on their retirement journey

As well, there are problems with the assumption that plan members will be able to achieve their financial goals if they’re able to replace 70 per cent of pre-retirement income. “Finding ways to provide your employees with the knowledge they need to achieve their financial goals is vital to ensuring they are less stressed during their savings years and are prepared to retire on time.”