Preparing employees for retirement

Employees will turn to employers for help as retirement age approaches

Planning one’s own retirement is a daunting task, so what counsel can an HR professional offer employees with less experience in personal finances? The decisions are mind-boggling to say the least. Having some basic core knowledge can help HR practitioners help employees plan for retirement.

The ‘financial retirement house’

Employees will need to thoroughly understand where their retirement income will come from and estimate the amount from each source. This is perhaps most easily done by mentally framing a financial retirement house. This house is defined by the foundation being basic government programs, the main floor consisting of employer-sponsored programs, and the roof consisting of personal registered and non-registered investments.

Government programs comprise mainly of the Canada Pension Plan (CPP) and Old Age Security (OAS). While CPP is available as early as age 60, there is a penalty of 0.5 per cent a month when starting before the normal age of 65. On the flip side, for those who can afford to wait longer than age 65, there is a bonus of 0.5 per cent per month up to the age of 70. One area of confusion on the part of many employees is that once CPP starts at a given amount it will adjust to the unreduced pension of age 65. For example, some employees think that if they start CPP at age 60, they will receive a reduced pension until age 65 when the full unreduced amount kicks in. Unfortunately, this is not the case.

While CPP is only available to those who contributed to it, OAS is available to all who meet residency requirements at the age of 65. Even those who stayed at home to raise children are eligible, assuming they meet the residency requirements.

The main floor of the house consists of employer-sponsored programs, both defined benefit (DB) and defined contribution (DC) where applicable. DB plans offer employees a solid source of retirement income as employees can estimate their future payments through their pension estimate. The payment is guaranteed for the life of the pensioner, and the amount varies depending upon the partner survivor benefit and whether the pensioner has chosen a guarantee option, under which pension payments will continue to be paid to a beneficiary for the remainder of the period.

DC plans, however, are more challenging since employees need to make their own investment decisions. These decisions greatly affect the value of the plan at retirement and hence their retirement income stream. To make things more complicated, at retirement, employees need to decide if they will take the value of their DC plan and purchase an annuity, a life income fund/lifetime retirement income fund (LIF/LRIF) or a combination of the two. An LIF allows pensioners to maintain full control of investment choices up to age 80 in most jurisdictions, while allowing them the option to withdraw funds up to a certain amount, if needed. An LRIF similarly gives pensioners the same options to control investment and withdraw funds, but whereas an LIF has to be converted into a life annuity at a certain age, an LRIF can be held indefinitely.

While the DC plan seems confusing there can be great benefit to it as well, such as the ability to customize payments, the preservation of capital and the possibility of enhanced returns compared to assumed conservative rates used for DB plans.

The roof of the house consists of personal Registered Retirement Savings Plans (RRSPs), non registered investments and other savings and income. At retirement or by the end of the calendar year in which the RRSP holder turns 69 they will need to convert the RRSP into an annuity or an RRIF (or a hybrid of the two). An RRIF is very similar to the LIF/LRIF except that there are no maximum withdrawal limits but minimum limits do apply. Employees need to think about the most tax-efficient manner in which to use all these different income streams in retirement while trying to satisfy their retirement lifestyle choices. This should also include the size of estate they wish to leave behind.

Some retirement tips

When contemplating retirement, employees should have a simple lifestyle plan. This plan may be nothing more than a list of activities they enjoyed while working and an agenda of how they expect to replace those activities. An interesting fact is that most people do not realize they will have an additional nine to 12 hours per day after they stop working. Not having a plan to fill those additional hours on a daily basis can lead to financial and emotional stress.

For employees who feel they cannot afford to retire, there are some general tips that may be helpful. Perhaps they should think about postponing their retirement a few years or working part time while in retirement. The latter not only helps with the financial situation but will also help them stay mentally and physically engaged.

Employees can also choose to adjust their retirement lifestyle. This may mean moving into a less expensive home, selecting less costly retirement activities or making better purchase decisions such as driving a less expensive car.

Employers can help

Since most employers offer workplace group retirement programs, employees can turn to their employer for help when it comes to personal financial planning. While traditionally employers have shied away from providing this type of assistance, more and more are realizing they not only have a fiduciary responsibility but also a vested interest in helping employees. Financially educated employees will enjoy maximum benefit from existing group retirement plans and also contribute to a healthier corporate bottom line.

The prudent way to help employees when it comes to personal financial planning is to devise a comprehensive financial education program using an independent and unbiased third-party. Your employees will thank you for it.

Asaf Shad is president and CEO of Acquaint Financial, a Brampton, Ont.,-based financial education and counselling firm. He may be reached at [email protected].

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