After the market rollercoaster ride of 2020, investors’ expectations have shifted considerably, and many are now looking for returns of 10.6 per cent above inflation from their investments in 2021, fuelling speculation that many employees may want to retire early, according to Eckler Ltd.’s latest capital accumulation plan income tracker.
Indeed, the report noted rising equity markets during the second quarter of 2021 shielded members from decreased annuity rates and improved member outcomes — a typical male defined contribution pension plan member retiring at age 65 at the end of June, achieved a gross income replacement ratio of 59.2 per cent and a female DC plan member achieved a 57.6 per cent replacement.
The report outlined that over the past 20 years, a balanced portfolio consisting of 60 per cent equities and 40 per cent bonds generated an annualized return of 6.6 per cent, while Eckler’s long-term capital market assumptions project an average annual return of 5.1 per cent over the next 20 years. If a typical DC member earned an annual return of 10.6 per cent after inflation on their investments, the report surmised they’d be able to replace around 90 per cent of their income at retirement.
According to the report, the steep market downturn and recovery in 2020 garnered different retirement outcomes for DC members who retired within 16 months of each other — those who retired at the end of June this year received a seven per cent higher annual income for life compared to those who retired in March 2020 at the onset of the pandemic.
At the start of the pandemic almost 18 months ago now, the report found DC investors were transferring their investments out of risk-seeking assets into low-risk assets, which meant these investors missed out on the market rebound. Investors who decided to delay retirement during the coronavirus pandemic have enjoyed tremendous market gains over the past 15 months, and the report questioned whether this positive outlook may alleviate near-retirees’ fears of future returns and lead them to retire sooner.
Retirements were expected to increase coming out of the pandemic, and these market expectations will likely help to fuel that change, said the report, cautioning that plan sponsors should be prepared for the potential impact on their workforce planning.