Freedom 55? It’s looking more like Freedom 70 for some Canadians, but there are strategies that working baby boomers, generation Xers and millennials can employ now to lower their retirement age, according to a new annual report by Mercer.
The report found millennials often opt to invest conservatively in low-risk, short-term investments such as money market funds. Using this strategy means many younger workers may not be able to retire until they’re 70, but if they invest their workplace savings plan in a healthy mix of equities and bonds they could shave off three years and retire by 67, suggested Mercer. But it also warned that saving aggressively is key for millennials, since a savings rate that’s any lower than six per cent total annual combined employer and employee contributions means retirement may not be possible at all.
The consulting firm built three personas to predict when each generation could retire and then looked at what the employer and employee could do to lower the retirement age. The report defined the retirement readiness age as the age when a person can replace 70 per cent of their income in retirement. A 28-year-old who earns $45,000 per year, for example, would need to increase their combined savings rate to 10 per cent starting immediately to retire by age 65. But the report noted that not many millennials are likely to retire at age 65 since saving at that rate isn’t realistic for those with competing priorities such as paying down debt, managing student loans and buying a first home.
Meanwhile, gen Xers aren’t likely to be able to retire at the traditional age of 65 either. The report found a 45-year-old worker who earns $70,000 per year making a combined company and employee contribution of 10 per cent will be retirement ready by 68. With 20 years to go, the gen Xer could drop their retirement age to 67 if they were to save an additional three per cent every year for the rest of their career. And to retire by 65, the 45-year-old would have to immediately raise their combined employee and company contributions to a total of 17 per cent per annum, and remain at that level for the remainder of their career.
While many baby boomers, unlike gen Xers and millennials, had access to defined benefit pension plans, they may also find it hard to retire by age 65. For example, a 60-year-old who earns $100,000 with a combined company and employee contribution of 10 to 12 per cent to their workplace savings plan will be able to retire between ages 65 and 69. One factor delaying retirement age for boomers is the shift from DB to defined contribution plans, requiring a mindset shift many aren’t making, said the report. Also, employers offering less conservative investment vehicles, such as target-date funds, didn’t become commonplace until 2010, which likely proved too late for some boomers.
“Success is achievable and accomplished through an increased focus on re-engaging employees through innovative and less traditional approaches that evolve with the change in generations,” said the report. “Allowing access to employee savings that promote debt re-payment, while the company contributes towards retirement, access to personal savings accounts through the workplace and guidance to prepare employees as they approach retirement are all steps to moving employees towards financial freedom.”