Canadian 30-year-olds are already planning for retirement. Their attitudes and expectations toward it may shape how people save for the future and life at 65.
It’s not all about buying a house, taking vacations and starting families. Today’s 30-year-olds are focused on their retirement, too. A full 69% of the 500 30-year-olds across Canada who answered our survey said saving for retirement is an important focus in the next 10 years of their lives. That’s a bit unexpected, but what’s more is that 41% of respondents have already begun putting money aside. “It’s encouraging that many have started saving,” says Scott Perkin, president of the Association of Canadian Pension Management (ACPM)in Toronto. It’s a pleasant surprise and maybe a sign that plan sponsor communication messages are getting through. These 30-year-olds also realize that they will have to depend more on their own nest egg in retirement. When asked what percentage of their total retirement income they expect to come from their employer-sponsored retirement plan, they said 30%, with 40% from personal savings. They expect the remainder to come from the government (24%)and other monies(6%). “It looks like there is some sense of responsibility at age 30 about saving for retirement,” says Nic Crook, a principal with Towers Perrin in Toronto. He believes the increased awareness has to do with the amount of media coverage of baby boom issues, the capital market struggles of the early 2000s and the stories about underfunded pensions and plans going into default. “The 30-year-olds are absorbing the same press coverage and these younger workers started to pay attention.”
For Jean-Daniel Côté, principal with Morneau Sobeco in Montreal, that the other 59% of 30-year-olds have not started saving for retirement isn’t shocking. Having given numerous retirement seminars for this age group, Côté has noticed that retirement planning isn’t often on the priority list because “they want to live life now versus putting money away and enjoying life later on.”
HALF THE BATTLE
The fact that 25% of those respondents who said they are participating in a pension plan weren’t sure what type of pension plan they’re in supports Côté’s perspective. Forty-eight per cent said they were in a defined benefit(DB)plan, and 26% said they were in a defined contribution(DC)plan. Côté believes the percentage of 30-year-olds who don’t know to be much higher, even as high as 80%. He also speculated that some respondents might not understand the type of plan they are in, which could be as problematic as not even knowing. Teresa Morgan, national director, member services and marketing, group savings and retirement, for Standard Life in Montreal, agrees. “I’m not so sure they actually know what they do have,” she says. “I think the ones who have a DC plan know, but 48% for DB plans for that age group sounds too high.” Perkin described the result that 25% who don’t know as troubling. “It shows that they don’t understand or appreciate their plan.”
SAVE THE DB?
If, in fact, more 30-year-olds are in DB plans than many suspect, DB plans—or some form of them—might be worth saving, says Perkin. The DB mentality is definitely lingering with the 30-year-olds.
Fifty-eight per cent would prefer to receive monthly payments for the rest of their lives once they retire. When asked which feature is important in an employee retirement plan, 77% said having a guaranteed amount of income at retirement. “I don’t think they’ve moved away from the DB mindset,” says Morgan. “They don’t seem to want to know, and they want someone else to take care of it for them.” Paradoxically, the respondents expressed a desire for plan characteristics not associated with DB plans. Twenty-six per cent best described their attitude toward investing their employee pension dollars as wanting to invest assets as they see fit from a well-diversified menu of choices. When it comes to important features in an employee retirement plan, 80% selected portability.
“In one breath they are saying they want portability and in the other they want a guaranteed income plus the ability to invest how they choose,” says Bruce Moir, senior product manager, group plans, with Scotia McLeod in Toronto. “Portability, guaranteed income at retirement and ability to invest as I choose aren’t mutually inclusive.” Janet Rabovsky, practice leader, Central Canada, investment consulting, Watson Wyatt Worldwide in Toronto agrees, adding, “I think people are being unrealistic.”
SET IT AND FORGET IT
The paternalism of DB plans is appealing to 30-year-olds and they want more of that from employers. Of the respondents, 62% said they would want to be automatically enrolled in the pension plan with their contributions being automatically increased as their salary increases. “They are realizing [saving for retirement] is more complicated and there is less security than expected, so now they are uncomfortable,” says Crook.
“The desire for guarantee and auto-enrol is this discomfort coming through.” Perkin sees this as a reflection that 30-year-olds don’t really trust themselves when it comes to planning their retirement, and they are concerned about having adequate savings in retirement.
“If you match this with the 60% who want financial advice, I think there is a dawning that they are not getting it as well as they could,” says Rabovsky. With the majority of respondents wanting access to a financial planner who can help them make the most appropriate investment decisions, plan sponsors may need to take heed. “How do plan sponsors actually do that but still limit their liability?” asks Rabovsky. “Most sponsors are really worried about fiduciary risk, but they also realize that just providing information or education as per the CAP Guidelines through their vendors is not enough.” Moir adds that this desire from 30-yearolds may be an indication that lifestyle and lifecycle funds could become more popular in the near future as they provide an element of guidance for plan members without landing sponsors with all the legal responsibility.
THINGS TO COME
But what about the distant future when these 30-year-olds are looking to retire? According to the survey, 52% want to retire between ages 45 and 60. In addition, 61% of respondents said they would rather retire gradually than at once. Many see that as an unrealistic expectation, while others believe it is a sign that phased retirement is a necessary part of the employment landscape of the future.
“More and more people are realizing it’s a four-legged chair, and the extra stability comes from employment income,” says Crook. Thirty-eight per cent of respondents said they may have to take a part-time job to earn extra money in retirement, and 20% said they want to continue working.
“There are going to be some plan design changes or amendments to allow for this,” says Rabovsky, who believes retiring before 55 is unrealistic for 30-year-olds. “It’s going to be a balance for employers between keeping those people they want and pushing out those they don’t to avoid presenteeism.”
Morgan points out it’s curious that so many 30-year-olds want phased retirement and DB-style plan characteristics. “If you used a final average earning and you retire in a phased approach, your last years’ earnings could be significantly lower.”
These seemingly disconnected responses point to a need for more education and communication. That some messages, such as start saving early and don’t depend on one source of retirement income, have clearly gotten through to younger members is heartening. Thirty-year-olds appear to take their retirement seriously. They are listening and want to prepare for it. As they age and get closer to retirement, it will be easier for plan sponsors to get them engaged in planning for it. With that in mind, the future—with its aging workforce that’s been saving since its 30s—looks cautiously bright.
Juggling Many Worlds
A resident of the city of Quebec, Karine Cummings is a very busy woman. Not only does she work more than 30 hours a week with the mentally handicapped as a special services assistant, she is also a full-time student at the University of Quebec in Rimouski, at the Lévis campus on the Quebec City south shore, working toward a bachelor’s degree in special education.
As if this wasn’t enough, Karine is also planning to become a mother in the near future. “I’m 30. This is the right time to have children,” explains Karine, for whom family is very important. All this leaves her very little time for sports or her favourite leisure activities.
For Karine, the dental insurance and vision care coverage are key components of the benefits plan. “As my current work can be very physically demanding, I’d really like chiropractic services and massage therapy to be included as well.”
According to Karine, the employer has a duty to help employees maintain good lifestyle habits, but it is up to each individual to take himself or herself in hand. “It’s great if my employer gets me a reduced rate at a fitness centre or covers costs for psychological consultations, but at the end of the day, I’m the one responsible for my actions and how I am,” she says.
As she is in the process of changing careers, Karine is not thinking much about retirement. “I want to retire as early as possible, but it’s far from a current concern for me,” she admits.
At present, her savings go mainly toward her education. She knows, however, that she will be able to rely on the Government and Public Employees Retirement Plan to meet her needs during retirement, and she finds that reassuring.—Alexandre Daudlin
Talking About Communication: A Necessary Evil
Regardless of the age of the plan members, communication is the cornerstone to helping them. In our survey of 30- year-olds, 18% of respondents said they wanted more information when asked what their employer could do to make the retirement plan more valuable. This may come as a shock to some plan sponsors. In the wake of the CAP guidelines, websites have been loaded with piles of information to educate and satisfy the curious plan member. However, information still isn’t trickling down.
Teresa Morgan, national director, member services and marketing, group savings and retirement, for Standard Life in Montreal, says when the industry moved from defined benefit to defined contribution the education focus was on investments and not on the basics of saving for retirement. She believes communication for 30-year-olds and younger should include discussions about the importance of time and contributions. “Where they can really make a difference is with joining early and putting contributions in. We haven’t made as much emphasis on these and, as a result, they haven’t done them.”
When it comes to how to communicate, the current thinking is personalization. “I’m not talking about mass customization,” says Jean-Daniel Côté, a principal with Morneau Sobeco in Montreal. “That’s not about you. It’s about people like you.” He believes sponsors need to personalize information as much as possible to keep the member interested and engaged.
Janet Rabovsky, practice leader, Central Canada, investment consulting, Watson Wyatt Worldwide, suggests sponsors turn to their record keepers and get the data on the members. “Actually look at the information they can give back to you. You can see the behaviours of members—who is going on to the Internet, who is talking to the call centres, what they are asking, what people are looking at, what tools they are using, and how often are they making changes.” So members may not want more communication. They might just want better communication.
Retirement: What “Y” Wants
1. Thirty-year-olds are open to knowing more about their pensions. They said being given more information is the second most valuable thing an employer can do to make the plan more valuable.
2. These workers see their future quite clearly and it involves phased retirement for almost two thirds of them.
3. Having the freedom to move is significant for these employees. More than three quarters want portability in their pension plans.
4. Being able to choose from a menu of investment options appeals to these employees. More than a quarter want control over how their pension assets are invested, but want a diversified list to pick from.
5. More than half of 30-year-olds are looking for the defined benefit pension plan their parents had. They want set monthly payments for life once they retire.
6. When making pension investment decisions, most 30- year-olds want answers to their questions from professional financial planners.
7. Jet-setting is the No. 1 retirement plan of choice for 30-year-olds.
8. More than three quarters of 30- year-olds are either already putting away their pennies for retirement or thinking about starting.
9. Automatic is key. The majority of them want to be automatically enrolled in their pension plans and have auto increases for their contribution rates.
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