In a recent issue of The Actuary, an article titled "Retirement Security" tackles the risks of retirement and how those risks impact attaining a secure retirement in a defined contribution world. Although written from a US perspective, the issues highlighted are equally prevalent in Canada. I suggest the article should be required reading for all those trying to improve our retirement future.
The authors start by identifying a number of reasons why an individual's funds may not be adequate:
• Not saving enough money;
• Inadequate investment returns and poor investment strategy;
• Leakage—using funds too early, possibly as a result of cashing out savings as participants change employers, taking loans and not repaying them, or requesting hardship distributions;
• Premature death of the employee, leaving the family without adequate funds for retirement;
• Disability before retirement;
• Early retirement;
• Outliving retirement resources because they are used too quickly;
• Job changes, which disrupt the program of retirement savings; and
• Period of unemployment.
Some of these risks can be managed within the DC plan, but others require interventions or actions outside of the plan.
The authors conclude by highlighting some of the things individuals, employers and financial service providers should think about when helping individuals prepare for the future:
• More long-term planning;
• Encourage increased savings via communication and/or auto-escalation programs;
• Improve diversification and risk management in asset allocation defaults;
• Re-examining solutions for the payout period, and providing more options for structured solutions and a portfolio of options;
• Prepare people to work longer, and to keep skills up-to-date;
• More consistent focus on emergency funds so that retirement funds do not become emergency funds;
• Enhancing approaches to disability benefits so that when they work next to DC plans they support appropriate lifetime security. The disability benefit ideally should support continued saving for retirement until expected retirement age, but this is very rarely explicitly done when benefits are provided through DC plans; and
• Re-examining whether survivor and death benefits are adequate.
It's a good list - but, please read the article for more detail and background.