The decumulation challenge
As people continue to live and work longer, the challenge of longevity – running out of money too soon into retirement – is hanging over many Canadians’ retirement plans.
According to research from CCP Investments, only 45% of Canadians actually have some sort of plan in place for their retirement, with 53% admitting they don’t know how much money they’ll need to retire.
Part of this anxiety stems from a change in the last decades in the retirement plan landscape, as employers are opting for Capital Accumulation Plans (CAP) over Defined Benefit (DB) plans, says Caroline Fillion, FICA, FSA, and Manager, Group Products at iA Financial Group.
This shift is largely driven by the predictability of costs for the plan sponsor, making financial planning more straightforward for them. “With DB plans, the retiree has a guaranteed predictable monthly pension income – the financial risk is assumed by the plan sponsor,” she explains.
The increased participation in capital accumulation plans, however, shifts that burden.
Managing investments and longevity risks
As capital accumulation plans have matured, more employees are reaching retirement with assets solely accumulated in these plans.
“Some employees arrive at retirement with a significant amount of money accumulated but are often left alone to manage their own investment and longevity risks,” adds Fillion. “On the other hand, the aging workforce also becomes a challenge [here], because some of these workers may not be able to afford to retire – they might stay at work longer than they should.”
This situation can lead to decreased productivity over time as employees age – not to mention that financial insecurity can take a toll on employees’ mental health.
“If they worry a lot about their financial security in retirement and don’t have a strong plan in place for their accumulated assets, it can burden them and impact their role at work,” Fillion explains.
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