By Sheryl Smolkin
My husband and I are both looking at age 65 in the rear view mirror and we are helping to manage my elderly mother’s affairs. I think we have a pretty good grasp of what retirement costs and how easy it would be to eat through our nest egg if we are not careful.
That’s why I can’t help but be surprised by the results of the recently released Morneau Shepell study Forgotten Decisions: the disconnect between the plan and reality of Canadians regarding health and finances in retirement. The survey discovered many people make unrealistic plans based on the amount of income they are actually contributing to a retirement fund versus their expected annual withdrawal.
Expected withdrawal rate unreasonable
More than one-third (35%) of employee respondents report they are saving 10% or less of their current salary for retirement. Even more concerning is that, on average, employee respondents plan to withdraw 15% of their total savings a year following retirement – four times the rate that is typically recommended.
“More than 70% of respondents are planning to withdraw more than the recommended amount annually,” says Paula Allen, Vice President, Research and Integrative Solutions, Morneau Shepell. “There is an evident disconnect between how long retirement income typically needs to last, the savings pattern of many, and the withdrawal plans of most.”
The survey also found that responsibilities in retirement may include the need to support dependants. Seventeen percent of respondents indicated that supporting dependants was among the most important financial issues. Thirteen percent indicated concern regarding their support of dependent children and 14% indicated concern about the support of elderly parents.
Under-planning for health costs
The survey found that nearly two-thirds of employees age 50 and over (61%) are currently suffering from one or more chronic health conditions. Despite this, 97$ of survey respondents described their current level of health as being good, very good, or excellent and a large number of employees (86%) are expecting to retire in good health.
“Chronic health issues are so commonplace that sometimes they are accepted as the norm. Unfortunately, this can lead to complacency and lack of investment in one’s own health and lack of preparation for health costs,” said Allen. “The cost of chronic health issues, which often increase with age, can be a big shock during retirement, as employer health benefits may no longer be available for medication and other health-related support. As well, the public drug plan covers much fewer medications than most employer-sponsored plans.”
The most common chronic conditions affecting survey respondents include hypertension (25%), arthritis (24%), high cholesterol (18%), diabetes (12%), and depression, anxiety or other mental health problems (9%).
“Health is one of the most important factors to consider when preparing for retirement,” noted Allen. The majority of respondents (59% ) indicated they will not have access to an employer-sponsored health benefits plan after they retire. Two-thirds indicated health costs as one of their top concerns in retirement.
Employer/employee perceptions differ
Of the employees surveyed, one in four (24%) indicated that when they choose to retire, they will not be financially prepared. Twenty three percent of employee respondents plan to rely on government pension programs as a primary source of retirement income.
On average, however, more than half (51%) of employer respondents indicate that their employees will not be financially prepared when they retire. Furthermore, employers believe that one-third of their employees will not be financially prepared to deal with a health crisis when they retire.
Almost all employer respondents (96 %) indicated that it is important for employees to know that health costs will impact retirement income. Despite this, a large proportion of employers (29%) reported that they do not provide retirement-related financial information.
“Employers clearly see risk in the retirement preparedness of employees, but often do not have the systems in place to offer the necessary support and education,” said Allen. “Providing employees with more knowledge on the facts and options for personal financial management and health cost issues in retirement is crucial to adequately prepare employees for their transition to retirement.”