Despite strong stock market returns over the past year, replacement income levels generated by capital accumulation plans (CAPs) haven’t increased.
The results from Eckler’s Capital Accumulation Plan Income Tracker (CAPit) show other key factors are limiting that recovery.
Replacement income levels generated by CAPs dropped in the third quarter to 61% from 63%. This was largely due to continuing decreases in interest rates, which lowered annuity values and reduced replacement income levels.
“The average CAP member will spend at least 25 years in the markets, and we all hope our investment window will be a good one,” says Janice Holman, a principal in Eckler’s Toronto office. “But everyone’s time period will look different, depending on when they start and end their journey.”
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Research shows most CAP members don’t have realistic expectations for the returns they’ll earn. She says projection tools that use these lofty expectations or historical returns can generate misleading results.
“That’s not going to give an accurate picture of a member’s potential future replacement income. Determining future projected income is a complex calculation,” Holman explains. “Plan sponsors that find new ways of doing this for the member—with tools that use more robust assumptions—can help close the gap between member expectations and the retirement income their plan is likely to provide.“
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