Employer-sponsored retirement plans that offer matching contributions can help younger workers retire earlier and with more money, according to a new report by Mercer Canada.

The report based its findings on a sample worker aged 30 earning $70,000 and with $30,000 of personal debt, using five per cent of their income to either pay down debt or save for retirement during a time when the interest rate on their debt is higher than the expected rate of returns of their investments.

It found that if the employee had access to a workplace retirement plan with a 100 per cent employer match, they could retire with an additional $250,000 in retirement savings at age 65 if they focused on paying off debt instead of retirement savings from age 30.

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If they didn’t have a 100 per cent employer match, the employee could still retire with $125,000 more in savings if they focused entirely on paying off debt within 10 years before shifting their focus to saving for retirement.

Alternately, if that individual chose to split their disposable income between saving for retirement and paying down debt for the entire period until retirement at age 65, it could take more than three times as long to pay down the debt, said the report, noting this leaves them with a shorter period to make larger contributions.

It also noted some workplace retirement programs have started to evolve and recognize the importance of supporting financial well-being and retirement readiness with a more personalized approach.

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“For example, [some employers allow] employees to direct their own savings to a tax-free savings account or non-registered account where funds can be withdrawn for debt repayment, while still directing matching contributions from the employer to a traditional pension arrangement. Employers adopting plans with this type of flexible design are noticing higher employee engagement and financial literacy which is helping Canadians in their day-to-day lives.”

The report also found that the current high interest rate environment is advantageous for baby boomers moving into the decumulation phase. It noted a sample employee aged 65 with $500,000 in retirement savings who uses those funds to purchase a single-life annuity (based on pricing as at January 2024) could have a lifetime income of $26,000 per year in today’s dollars, which is $3,500 per year higher than if they chose to invest the $500,000 in a retirement income product that is subject to market fluctuation with a conservative investor profile.

However, the report also noted that an interest rate drop of 1.5 per cent would result in a reduced annual lifetime income of $21,800 in today’s dollars for the single-life annuity, which would be $1,700 per year less than investing the money with a conservative investor profile.

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