The average worker in Canada needs to accumulate 10.9 times their final pay, according to new research
Given the slow rise in real wages and the declining role of pension income seen over the past decades, it’s hardly surprising that workers are facing difficulties with respect to retirement readiness. Those in Canada might not appreciate the problem fully, but new research from Aon might be just the thing to make them take notice.
According to the company’s latest Real Deal report, the average Canadian worker – defined as a 45-year-old with annual earnings of $60,000, and with a workplace retirement savings plan that has 5% employee contributions and 100% employer match – will need to accumulate 10.9 times their final pay to maintain the same spendable income after they retire. That level of “retirement income adequacy,” as defined in the report, takes into account changes in savings, taxes, medical expenses, and other factors.
The Real Deal report has been used for more than a decade in the U.S. Drawing from its client companies’ plan data and workforce demographics, Aon helps them understand how different plan designs and investment structures can impact average retirement income adequacy.
“The retirement readiness gap is real for Canadian workers,” William da Silva, senior partner and Canadian director of Retirement Solutions at Aon, said in a statement. “Clearly, there's a need to look both at the substance of workplace retirement programs and at the 'soft' levers of education and information.”
The Canadian Real Deal report identified various sources of retirement income, including workplace retirement savings plans, government pensions from CPP and QPP as well as Old Age Security (OAS), and personal savings. The average Canadian employee, the study found, needs to put at 16% of their annual pay in workplace and personal retirement savings every year from age 25.
Sans personal savings, the report found that the average Canadian employee will be unable to meet the 10.9-times-pay target. To be financially ready to retire and maintain the same net available income, they’d have to delay retirement to age 70; alternatively, they’d have to lower their standard of living by approximately 30%.
Younger workers have a bigger challenge ahead of them, Aon said. Aside from the probability of a longer decumulation period owing to increasing life expectancy, they have to account for inflation in medical costs that outpaces the rise of salaries over time.
“Every employee has unique circumstances, and how much an individual should save ultimately depends on their own goals and resources,” said Rosalind Gilbert, senior actuary and associate partner, Retirement Solutions at Aon. “Canadian employees have clear expectations that their employer should provide increased support for their overall financial wellbeing, and Capital accumulation plan (CAP) sponsors are focusing on areas that are well aligned with this objective.”