How much your employees need to save for their retirement: rules of thumb
There, in black and white
NB Bulletin Vol. 12 N. 9, July 2009
The current financial market crisis has led many employees to question some fundamental retirement savings concepts and strategies. Will investment in stocks yield a better long-term return than an investment in bonds? Add to this the fact that, beyond contributions paid to your capital accumulation plan (CAP), whether it is a defined contribution (DC) registered pension plan, a group registered retirement savings plan (RRSP) or a deferred profit-sharing plan (DPSP), your employees generally find it difficult to determine how much they need to save for retirement.
How much do I need to save?
The ideal way to determine how much to save is to have employees plan their retirement activities, estimate the income needed to complete these activities and then establish (project) the retirement savings level required to achieve this goal. Recommend that your employees contact your CAP administrator's call centre, which offers various tools that will help them with this exercise. They are also free to contact the financial planner of their choice. You can also suggest that they follow the rules of thumb below:
The retirement savings level also includes the amounts paid to any other RRSP or to a locked-in retirement account (LIRA), and the value of any annuity paid from a defined benefit (DB) registered pension plan in which the employee previously participated or payable directly from a life insurance company.
In which asset categories should I invest?
To answer this question, employees must first determine their investor profile. Your CAP administrator, as well as many financial advisors and institutions, have access to various tools used to determine this profile. You can, however, suggest that your employees use the following rules of thumb to determine the percentage to invest in stocks:
Thus, for an employee aged 48 with a moderate profile, the rule of thumb recommends investing 52% (100 minus 48) of the retirement savings in stocks. You will notice that with this rule of thumb the percentage will decrease as the employee approaches retirement, thereby decreasing the risk of these savings fluctuating significantly during the period preceding retirement. Many investors experienced this type of fluctuation in 2008. It is important for your employees to ensure that they do not let their age influence their choice of investor profile because this will introduce an unnecessary conservative bias. When your employees approach retirement (for example in the three years before retirement), you can recommend that they review their asset allocation based on their retirement payments strategy.
What funds/managers should I use?
There is currently no rule of thumb that can be used to answer this third question. However, when selecting the appropriate funds/managers for your employees, keep in mind that they will not be investing in the past, but in the future. Be sure to ask the right questions to assess return forecasts for the funds/managers being considered, and do not rely solely on past returns.
Please feel free to contact us for additional information.
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