Retirement income can be sliced into three broad categories: what an individual receives from their employer, what they receive from the government and everything else.
While plan sponsors are naturally most concerned with what they provide for plan members, including all forms of income in the conversation is integral to properly planning for retirement, says Philippe Keough, manager of compensation and benefits at Eacom Timber Corp.
Though Keough isn’t certified as a financial advisor or retirement planner, he tries to have a one-on-one conversation about retirement with any employee who wants one. The organization’s plan members, who work at lumber mills across Ontario and Quebec, have relatively low financial literacy, he says, noting Eacom Timber has a defined benefit plan that’s closed to new members, a defined contribution plan and a group registered retirement savings plan.
Every time Keough visits a mill, he notifies human resources so any employee who wants to have a pre-retirement chat gets the chance. Of course, his approach avoids providing any actual investment advice, but he puts a lot of effort into prompting plan members to ask useful questions.
“I’ll start with something like, ‘What age are you planning to retire?’ Because whether it’s 60, 65 or 70, it’s going to be totally different on the budget side. What are you planning to do during your retirement? We see golfing and sailing and all of these vacations . . . so it’s to help the employee understand how much money they’re going to need in their budget. And also, ‘How are you planning to do your retirement? Are you planning to be very active in the first few years and then really quiet in the next few?’”
Lately, in addition to more expensive leisure activities, members have said they’re planning a “Netflix retirement,” where they simply plan to take it easy. “In that case, their budget is pretty stable throughout their retirement and it’s not very expensive. Whereas others say, ‘I’m going to remodel my home. I’m going to build myself a cottage,’ . . . so each is individual.”
Once Keough asks these questions, prompting members to establish how much they’ll need for their desired retirement, he encourages them to view retirement income in two halves: a fixed and a variable portion. The fixed amount is coming from sources like the Canada Pension Plan or Quebec Pension Plan and old-age security, while the variable amount is everything else, including income from Eacom Timber’s pension plans and all other sources.
To actively prepare for retirement, plan members also have to determine where the variable amount is going to come from, he says. “How are you going to do that? Are you going to do it with an RRSP or with a soft retirement, continue working, while doing something less strenuous for a few months a year? Or are there other types of investments you may have?”
Keough also points out some of the basic differences in how certain investment vehicles work, providing employees with the example of buying a new truck in retirement and demonstrating the implications of drawing $10,000 from a tax-free savings account or an RRSP to pay for it. If the money comes out of a TFSA, it’s simply $10,000; if it comes out of an RRSP, it’s added to that year’s overall taxable income. “When you’re retired, you have to plan for that, so these are questions I give them to teach them tricks and tips.”
It’s also important for plan members to understand exactly how much they can expect from CPP, he says, noting employees — and even their financial institutions — may assume they’re eligible for the maximum. “It’s good to find out now, because you could have a shortfall of $200, $300 a month. You better know now and not next year when you retire.”
Don’t take my word for it
When the Ontario Pension Board is dealing with plan member questions, the initial points of contact are its client care associates, says Peter Shena, the organization’s executive vice-president and chief pension officer. If it’s a more complex situation, the member is passed along to financial advisors the OPB has on salary who can delve deeper into the issue.
“A lot of times, people don’t understand the significance of a pension plan with what’s going on in their lives,” he says. “An example is a [plan member] could call in and say, ‘Hey, I’ve got to change my address, what do I do?’ And a couple of questions finds out whether this person is just moving from house A to house B or if it’s a marriage breakdown that’s triggered it. And if it is a marriage breakdown, there are other considerations that they need to be aware of and they need to begin a conversation with our folks because we are going to get a letter from a lawyer that’s going to be demanding information.”
Indeed, a plan member’s spouse and their income and retirement provisions should play into the conversation regardless, he notes. “When we have these conversations with the [plan member], we encourage them to bring their spouse or partner. And if they have an outside financial planner or advisor, we’re happy to bring that person along too so that conversation takes place in tandem.”
Part of guiding members’ decisions, says Shena, includes explaining the benefits of an RRSP or TFSA in conjunction with what’s provided by the OPB plan. For example, a member may want to purchase additional coverage with the OPB through their RRSP.
“If someone takes a leave of absence, such as for maternity leave or paternity leave, that period of time that they’re off can be purchased and established as credit within the pension plan. Or they may have a prior period of employment with an employer that participates in the plan. So our advisors probe on that information with the plan member. . . . Does it make sense to save in an RRSP or does it make sense to purchase that area of service? Or the third option is you take the money from the RRSP and purchase the service in the plan.”
Save, save, save
Despite the lack of a DB guarantee, DC plan members may have a vague impression that, if they’re contributing to their plan to the fullest extent, they’re covered, says Jay Hopkins, director of group retirement at the Leslie Group Ltd. “If your company plan is offering a three per cent match, you need to have enough education available that it may not be enough for most members.”
With more Canadians becoming comfortable with virtual tools like Zoom, he suggests plan sponsors seize these opportunities for educational activities. “You might spend two weeks a year planning your vacation. Well, let’s spend at least a couple of hours a year trying to plan your long-term vacation.”
By and large, plan members simply have to save more, adds Hopkins, so if plan sponsors already offer a DC pension or a group RRSP, there’s no real reason not to offer a group TFSA as well. “For plan sponsors educating on these things, in general, the fees your members are going to be paying are lower, so why not take advantage of that with a TFSA. And most carriers will allow you to offer a TFSA for the same fees that you’re offering for your other products.”
Edith Crespin, manager of human resources at SARCAN Recycling, says the company encourages workers to save through personal accounts in addition to its DC plan. “Our employees know that, if they wanted to add their TFSA as a secondary account, we can deduct from payroll and we can do the same for RRSPs.”
Prompting plan members to save more is integral to their ability to meet their retirement goals, says Greg Pallone, senior vice-president of employee benefits and group retirement services at Hub International Ltd., noting workplace education has to focus on helping them understand that.
“That’s where the gap has been over the last decade. [There are] a lot of great products out there, but there’s such a lack of understanding about how each of these components to retirement savings fits together to provide employees with a better outcome throughout their careers.
“For example, TFSAs are a great short-term vehicle, but they can also be used during retirement because you can continue to contribute to them long after 71, which tends to be the limitation now for many of the registered retirement savings products.
“And it allows you, sometimes, to bridge the gap between your retirement base and when you might want to take retirement income from a [registered retirement income fund] or even annuitize some of your savings. All of that comes with a lot of education and advice.”
Gather ye rosebuds
Record keepers are also recognizing the need to help plan members bring these layers of retirement income together to get a clear picture of what’s possible.
Sun Life Canada’s online, self-serve retirement planner provides a platform where members can piece together the puzzle, says Kate Nazar, the insurer’s vice-president of strategy and market development for group retirement services.
“It’s kind of a three-legged stool where it’s workplace, personal savings and government savings and you need a tool to bring it all together. What I love is that we’re able to provide not only what their aggregated retirement savings are from a full dollar amount, when you pull all these pieces together, but we’re actually giving an income view, which I think is really critical for people to understand what they’re going to have on a monthly basis to meet all of their needs.”
Plan members can also save their profile within the platform as they go, which makes it easier for them to gather detailed information together from disparate sources, she adds. And having this clear view can prompt action because the member can see whether they’re current patterns will successfully lead to their future goals.
“You’re really nudging people to make changes at the moment when they’re figuring out, ‘I’m on track’ or ‘I’m not on track.’”
Martha Porado is an associate editor at Benefits Canada.