The Future of Retirement A new reality. Canada Report

Transcription

1 The Future of Retirement A new reality Canada Report

2 Contents Foreword Foreword by HSBC Introduction Key findings Part One: Getting the retirement you want y Retirement hopes and fears y How much money will be needed in retirement and where will it come from? Part Two: The obstacles to saving y Why are people not saving for retirement? y Short-termism in savings behaviour Part Three: The role of saving and planning y When do retirement saving and planning begin y The drivers of retirement saving and planning y How people make financial plans for retirement y The planning premium Practical actions towards a more comfortable future At HSBC, our purpose is to help our customers fulfil their hopes and dreams and realise their ambitions for themselves and their families, by enabling them not only to manage their financial affairs today, but also to plan for their long-term financial futures. I am therefore delighted to introduce the latest in HSBC s series of independent global studies into The Future of Retirement. A new reality is our eighth report and highlights the real challenges in planning for and achieving the retirement you want. This report reveals that saving for retirement is a challenge that most people face around the world. Most people hope and aspire to a positive retirement filled with family and leisure pursuits. However, the majority of non-retired people admit that financially they are not preparing adequately, or at all, for a comfortable retirement. There are, of course, many obstacles to saving, including the lack of a regular savings habit and the financial impact of unexpected life events. However this is creating a ticking time-bomb, where the hidden impact of their lack of saving will only become clear to them years later, when they retire without the income to enjoy their retirement. Too often an optimistic hope for the best mentality is standing in the way of sensible financial planning. The report also highlights the reality that people who have a financial plan in place, particularly if they also take professional financial advice, on average will have more money in retirement than those who don t have a plan. The reason is simple - they save more and they save for longer - with people saving on a regular basis having nearly double the mean value of retirement savings compared with those just saving from time to time. With life expectancy still on the increase, the need to save and plan for your retirement is becoming ever more critical. Retirement is one of the five customer needs all of our Relationship Managers discuss with our customers, and we hope the insights from this report will encourage everyone to think more about the need to plan and save for their retirement, and to start as early as possible. Simon Williams Group Head of Wealth Management, HSBC 3

3 Introduction HSBC s The Future of Retirement programme is a world-leading independent study into global retirement trends. It provides authoritative insights into the key issues associated with ageing populations and increasing life expectancy around the world. The latest global report, A new reality, is the eighth in the series and is based on a survey of more than 15,000 people in 15 countries in July & August A further report looking at how people are living in retirement will be published later in the year. This country report, based on the views of over 1,000 respondents in Canada, highlights our main findings into what people are looking forward to from their retirement and how they are expecting to pay for these aspirations. The first part highlights people s hopes and fears for Family and travel are the most important aspirations for retirement retirement. The second part explores savings behaviours and what factors encourage and discourage saving. The third part focuses on how people are currently saving and planning for retirement, and whether they are doing enough. The final part lists some practical actions that people can take to improve their financial well-being in later life. The global report, other country reports and all previous reports are available on retirement. Key findings y More than half (5) of Canadian respondents think their retirement preparations are inadequate: 23% are not preparing at all, while 32% say they are not doing enough. y People run the risk of living long beyond their retirement savings: on average Canadian respondents expect their retirement to last for nineteen years, but their retirement savings to last for only eleven years. y The average Canadian respondent believes that 3 of their retirement income will come from the state, and for 4 the state pension will be an important source of retirement income. Given that Canadians want a retirement income that replaces four-fifths (81%) of a comfortable working life income, there is an overreliance on state benefits. y Respondents understand the importance of preparing for retirement from early on in life: on average, they see the age of 35 as the latest by which people can start planning financially and still expect to maintain their standard of living in retirement. y When asked to choose between saving for the short-term goal of a holiday and the longer term goal of retirement, Canadian respondents ranked these priorities almost equally: if they could only afford to save for only one of these options for a whole year, 41% chose a holiday, whilst 4 chose retirement y Employer-led initiatives are an important incentive to retirement saving: 2 of Canadian respondents started planning financially for retirement after their employer paid into a pension for them, although a more important motivator is the desire to achieve a good standard of living in retirement (4). y In Canada, there is a strong relationship between formal financial planning and saving more, when we look at the retirement savings levels of respondents. Amongst both men and women those using formal planning have greater levels of retirement savings than those who plan informally. Moreover, those who use professional advice typically have two to three times the retirement savings of those who have not used such advice. 4 5

4 Part One Getting the retirement you want Retirement hopes and fears To understand retirement savings needs in Canada, there is a need to understand people s aspirations for later life. The most popular retirement aspiration is the desire to spend more time with friends and family (5). Almost equally desirable is the ability to take frequent holidays (4) and travel extensively (42%). Respondents were also questioned about their fears around retirement. The most common concerns are financial hardship (5) and poor health (50%). Taken together, these findings suggest many are rightly worried about the growing problem of paying for healthcare and long term care in retirement. According to the UN, by 2050 it is estimated that there will be 42 Canadians aged 65 or over for every year olds, compared with a global average of 26. Figure 1: Spending time with family and friends & travelling are key retirement aspirations Q: Many people have specific hopes and aspirations for their retirement. Which, if any, of the following are important aspirations for you? (Base: All not fully retired) How much money will be needed in retirement and where will it come from? Spending more time with friends and family Frequent holidays Extensive travel Learning a new skill/hobby Continuing to work to some extent Taking more exercise/playing more sport Home improvements/gardening Charity/voluntary work Buying a new car/other expensive item Living abroad Learning a foreign language Further education Writing a book Starting a business % 32% % % 4 5 Respondents were asked how much money they feel they will need to live comfortably, both now and in retirement. Using these figures, the findings show that the proportion of working age income that respondents believe they need for a comfortable retirement is 81%. This indicates how much savings behaviour will have to change in order for people to achieve their aspirations in later life, especially as 32% of respondents are not adequately preparing for retirement, and onequarter (23%) are not preparing at all. To further reveal the inadequacy of current savings levels, respondents were asked not only how long they expected to live in retirement, but also how long they expected their savings to last. The findings reveal that on average Canadian respondents expect their retirement to last for nineteen years, but their retirement savings to last for just eleven years. None of these Figure 2: Financial hardship and poor health are the biggest retirement fears Q: Many people also have concerns or fears for their retirement. Which, if any, of the following concerns or fears do you have? (Base: All not fully retired) Financial hardship 5 Figure 3: Almost a quarter are not preparing at all for retirement Q: Overall, financially do you think that you are preparing adequately for a comfortable retirement? (Base: All not fully retired) 23% 11% 81% : People need four-fifths of current income to stay comfortable in retirement Poor health 50% Having to work for longer than I want to Not having enough money for good healthcare provision Not being able to realise my hopes and aspirations Loss of memory Boredom Loneliness 2 22% No, I am not preparing at all No, I am not preparing adequately Yes, I am preparing about adequately 32% 2 Financial hardship and poor health are the biggest retirement fears Not being able to work The move from active to passive retirement 1 Yes, I am preparing more than adequately Discrimination 6 None of these 7

5 8 Respondents say that they will need a household income of CAN$48,0 a year to feel comfortable in retirement. As Figure 4 shows, even Figure 4: A large proportion of retirement income is expected to come from the state Q: Once you are fully retired, what proportion of your retirement income do you expect will be funded from each of the following sources? (Base: All not fully retired) % % 3% 2% 1% 2% when taking other sources into account, respondents still expect to be heavily reliant on the state to provide their retirement income. 3 33% % % 1 51% 42% 4 23% 1 3% 3% All Figure 5: The state will be an important source of retirement income for nearly half of respondents 1 11% 1 22% 21% 1 23% 3% 2 2 Figure 5 reinforces this point, showing that nearly half (4) see the state as contributing towards retirement income. State pension(s)/benefits Company pension(s) Personal pension(s) Investments, e.g. bonds, endowments, shares, unit trusts, mutual funds Cash savings/deposits Property income and assets, e.g. renting out, equity release, downsizing, sale Inheritance Selling a business Q: Thinking again about the way you envisage funding your own retirement, which of the following means do you think will contribute towards your living in retirement? (Base: All not fully retired) State pension/social security Cash savings/deposit accounts Personal pension scheme Defined benefit pension scheme Mutual funds/unit trusts and investments Defined contribution scheme Spouse/partner s income Income from property downsizing /sale/rental Life insurance Inheritance Stocks and shares Annuities Other employer pension scheme Other savings/investment products Employer savings/share scheme Long-term care insurance Investment-linked insurances Financial support from my children Other financial windfall Selling a business Offshore trusts/deposits Foreign currency Other % have never saved specifically for retirement Part Two The obstacles to saving Why are people not saving for retirement? Only 40% of Canadian respondents are regular savers. Of those who have never saved for retirement, three-fifths (60%) are being held back by the cost of day-to-day living, rising to 6 of year olds. Nevertheless, respondents seem to understand the importance of preparing for retirement from early on in life and on average see the age of Figure 6: Non-savers are put off retirement saving due to the cost of day-to-day living Q: Why have you never saved specifically for retirement? (Base: All never saved for retirement) All my money goes into living day-to-day I ve never really thought about it The economic climate has been too unstable My employer doesn t/didn t offer a pension scheme Retirement is too FAR away from me to start saving My employer s pensions(s) are/were sufficient for my retirement I m saving/investing in a different way I have never worked full-time I have other pension arrangements in place I don t trust financial services companies I don t understand savings and investments Retirement is too CLOSE for me to start saving My partner s pension/savings will provide sufficient income The State will provide sufficient income Other reason 3% 1 35 as the latest by which people can start planning financially and expect to maintain their standard of living in retirement. 19 vs.11 people expect to spend 19 years in retirement, but their savings to run out after 11 years 60% 9

6 Figure 7 shows that there are some life events that can derail people s efforts to save for retirement. The most important of these are becoming unemployed, getting into debt, and buying a home/ paying a mortgage (2 each). Life events can have a damaging impact on retirement preparation: 6 of those affected by at least one of the events in Figure 7 said they saved less for retirement as a result. In Canada, the most impactful life event affects people s retirement savings behaviour on average for five years, in line with the global average. Importantly, nearly three-quarters (70%) of those whose ability to save for retirement was ever impacted by a life event say they are still being affected by the consequences. Figure 7: Becoming unemployed, buying a home and starting a family impact people s ability to save for retirement Q: Some people experience life events which impact significantly on their ability to continue saving for their retirement. Which, if any, of the following life events have EVER impacted significantly on your own ability to save for retirement, and which one has impacted you the most?(base: All not fully retired) Becoming unemployed Getting into debt/severe financial difficulty Buying a home/paying a mortgage The recession/current economic downturn Significant drop in earnings/pay cut Illness or accident preventing me/my spouse working Starting a family Paying for children s education Paying for my own education Separation/divorce Finishing full-time education Having to fund/pay for a dependent Getting married/civil partnership Starting work Having to stop work to look after someone Remarrying Other event None of these events have significantly impacted % 20% % Figure 8: Respondents in Canada see saving for a holiday as almost equally important to saving for retirement Q: If for one year you could only afford to save EITHER to go on holiday OR towards your retirement, which would you be more likely to do? (Base: All not fully retired) All France UK USA Canada Brazil Mexico UAE Egypt Hong Kong India Malaysia China Taiwan Singapore Australia Save to go on holiday Save towards retirement Figure 9: Only one-in-four would use their retirement savings to deal with a crisis Q: Sometimes people experience unforeseen life events, which can lead to serious financial hardship. If you were to experience such hardship which, if any, of the following actions would you be most likely to consider? (Base: All not fully retired) Use my other savings & investments 33% Use my retirement savings & investments 2 Short-termism in savings behaviour Look for better-paid work Move into a smaller home Borrow (more) money 23% 20% 1 Another obstacle to retirement saving is the tendency to focus on the short-term: immediate savings needs are more tangible and therefore may be given a higher priority than far-off goals like retirement. Respondents were asked to choose whether they would save towards a holiday or retirement, if they could only afford to save for one in a single year: 41% of Canadians chose the former compared with 4 who opted for saving for retirement (see Figure 8). This suggests that for many, shortterm financial needs take precedent over longer term financial priorities. On the other hand, most Canadian respondents are reluctant to dig into their retirement savings as a means of dealing financially with an unforeseen crisis. As Figure 9 shows, only 2 would look to their retirement savings to get through serious financial hardship, preferring to turn to their other savings (33%). Just under one-in-four (23%) say they would look for better paid work. Taken together, this means that whilst putting shorter term savings goals first may reduce contributions to retirement savings, the reluctance to draw on long-term savings in an unexpected crisis will help to preserve the value of retirement savings for respondents in Canada. 2 say becoming unemployed has affected their ability to save for retirement Sell my valuables Sell my main home Ask friends and family for help Use my insurance(s) Sell my second home/other property Sell my business/business assets Other action 2%

7 Part Three The role of saving and planning When do retirement saving and planning begin? 5 are not preparing adequately for a comfortable retirement The findings show that saving (putting money aside for the future) and financial planning (evaluating the current situation, identifying future goals and taking action to achieve them) start at varying and different ages in the countries we surveyed. On average worldwide, retirement saving starts four years before planning for retirement starts, while in Canada the median gap is three years. These average figures hide the fact that 42% of Canadian respondents have never saved for retirement, including 4 of year olds. Figure 10: There is a smaller gap between saving and planning for retirement in Canada Q: At what age did you first start to save specifically for retirement? At what age did you first start planning financially for retirement? (Base: All not fully retired, chart shows medians and excludes those who have not started saving or planning) Age (years) started saving for retirement Age (years) started planning for retirement All 26 All UK 25 UK 25 France France USA 26 USA 28 Canada 27 Canada 12 Mexico 24 Mexico Brazil 25 Brazil 26 Egypt 28 Egypt UAE UAE India China Hong Kong Taiwan India China Hong Kong Taiwan 29 Singapore Malaysia Singapore Malaysia Australia 26 Australia The drivers of retirement saving and planning Figure 11 shows there are many developments such as starting work different reasons why people begin (1), a promotion () to save for retirement, though fear or getting out of debt () are far of financial hardship in retirement is less important triggers. by far the most common motivator, Employer contributions have chosen by nearly half (43%) of traditionally been an important part of all respondents. More positive retirement planning in Canada, and Figure 12 shows that this remains the case. These findings show that paying into an employee s pension can have positive effects beyond the obvious contribution towards retirement income: for 2, it was an incentive to begin planning for retirement. Elsewhere, the realisation that the state pension is not adequate is another driver of planning behaviour, with 2 saying it was the reason they began retirement planning Nevertheless, the most common motivation to plan for retirement is simply the desire for a good standard of living in retirement (4). Fear of not having enough in to live on in later life Tax efficiencies Running out of time to plan for retirement Qualifying for a company pension scheme It s what people do Advice from friends and family Advice from a professional financial adviser Starting work Paying off other debts News stories about low incomes in retirement Seeing my retired parents standard of living/quality of life is lower than I want Buying a home Starting a family Paying the mortgage off Getting a promotion or pay increase Government advice about the need to save for retirement A period of illness or injury Government cutting the State pension Finishing full-time education Getting married/civil partnership The economy recovering Children leaving home Remarrying Other reason 1% % Figure 11: Fear of financial shortfalls in retirement is motivating saving Q. There are many reasons why people start saving for retirement. Which of the following are the main reasons why you started or would start saving for retirement? (Base: All respondents) 13

8 Figure 12: Employer pension contributions provide a spur to retirement planning Q: What are the main reasons why you started planning financially for your retirement? (Base: All respondents excluding those who have not planned financially for retirement) I want/wanted a good standard of living in retirement It s the right/responsible thing to do My employer pays/paid into pension for me The State will not provide an adequate retirement I want/wanted to realise my hopes and aspirations in retirement I can/could afford to I want/wanted to retire early Advice from a professional financial adviser I want/wanted to have more in retirement than my parents Specific live event, e.g. getting married, starting a family My spouse/partner suggested I start planning I received a pay rise Other reason /can t recall 41% saved more for retirement as a result of having a financial plan in place As Figure 13 shows, financial planning for retirement can take several forms. The most common methods of retirement financial planning are informal such as 11% % 22% How people make financial plans for retirement people s own thoughts (3) and people s own approximate calculations (2), whilst 23% have not undertaken any form of financial planning at all. The planning premium The research looks at the relationship between financial planning and saving money. Globally, there is a positive relationship overall the planning premium with 4 of respondents saving more for retirement as a result of having a financial plan, compared with only 31% who did not save more. This relationship is almost as strong in Canada, where more respondents (41%) say financial planning led to increased saving for retirement, whilst 31% say they did not save more. However on closer examination, the findings reveal some further insights behind this headline. Of those who used a professional financial adviser for planning, 5 saved more for retirement as a result. And of those who consulted a professional financial adviser to develop a written financial plan, 6 saved more for retirement. Self-directed planning appears less helpful: only 3 of those who relied on their own thoughts and actions saved more for retirement. In Canada, the planning premium is slightly weaker amongst those nearing retirement: amongst year olds, just 3 say financial planning has led to them saving more for retirement. This direct relationship between financial planning and greater savings is not just a correlation, it is a cause and effect: many respondents say that having a financial plan led them to save more for retirement. In Canada, generally those using formal planning have greater levels of retirement savings than those who plan informally. Moreover, those who use professional advice typically have twice (men) or three times (women) the retirement savings of those who have not used such advice. However, the planning premium appears weaker amongst those on average incomes. Figure 14: Over two-fifths believe financial planning has boosted their savings and those that do so have saved more Figure 13: Retirement planning is largely self-directed Q: Planning financially for retirement can take several forms, both formal and informal. In which of the following ways, if any, have you ever planned for your retirement? (Base: All respondents, chart does not show those who have not planned for retirement) Q: As a result of having a financial plan in place, would you say you have saved more for your retirement and for other purposes? (Base: All respondents excluding those who have not planned financially for retirement) My own thoughts 3 Retirement saving Other saving My own approximate calculations 2 Conversations/meetings with a professional financial adviser 22% My own to do list 20% Written plan routinely reviewed with a professional financial adviser Advice/plan drawn up by HR/Benefits/Pension team at work 11% 31% 3 Online self-directed planning solutions/tools One-off written plan from a professional financial adviser Other 41% 40% /can t recall 1 14 Yes No Not applicable - I don t have a financial plan in place 15

9 Figure 15: Financial planning and advice have a positive effect on retirement savings levels Q: Thinking now about the total value of all your retirement savings and investments (including any defined benefit, defined contribution, personal, or other pensions schemes, including employer contributions), approximately what is the total value of these savings and investments? (Base: All respondents) Respondents who Retirement savings & investments values (mean) All respondents Average income respondents* Men Women Used formal retirement planning CAD 228,082 CAD 103,879 CAD 295,574 CAD 163,488 Used informal retirement planning CAD 206,796 CAD 112,759 CAD 260,059 CAD 141,471 Practical actions towards a more comfortable future Here are some practical steps people can take to improve their financial well-being in later life, based on the key global research findings: Did not use any retirement planning Used a professional financial adviser Did not use a professional financial adviser *Income CAN$32,001 40,000 CAD 32,710 (N/A low sample size) CAD 51,847 CAD 15,251 CAD 247,588 CAD 111,434 CAD 311,742 CAD 181,815 CAD 108,661 CAD 112,105 CAD 156,527 CAD 57,533 All respondents CAD 154,760 CAD 111,880 CAD 207,344 CAD 99,352 Action 1: Get real about your retirement needs Globally, respondents believe their savings will run out on average halfway through their retirement. With life expectancy increasing, people need to be aware how long their money will have to last, so that they can take steps to avoid any shortfall. Action 4: Plan for the future There is a direct link between having a financial plan and saving more: globally, 4 say they saved more for retirement with a financial plan in place, whilst only 31% say they did not save more. Having a financial plan and just saving something, however small to start with, can make a big difference to retirement income in the long run. Action 2: Put your savings priorities in order Globally, 22% are not currently saving anything for retirement, whilst 43% would choose saving for a holiday over saving for retirement if they could only afford to do one for a year. A proper balance needs to be established between spending on short-term needs and saving for longerterm goals such as retirement. Shifting priorities now towards longer-term saving can lead to a more prosperous future. Action 5: Use professional advice to improve your savings position Looking at respondents with average incomes, those who use professional advice when planning their future have the greatest levels of retirement and other savings. Developing a financial plan with a professional adviser can help ensure that all retirement needs are identified, gaps avoided, and eventualities covered. Action 3: Be aware of how major life events affect saving for retirement Life events, such as starting a family, impact on retirement saving behaviour for an average of four years. As most people will be affected by these events at some point in their lives, it is important to prepare in advance to minimise the detrimental impact on their retirement savings

10 HSBC Insurance Holdings Limited 2013 All rights reserved. Excerpts from this report may be used or quoted, provided they are accompanied by the following attribution: Reproduced with permission from The Future of Retirement, published in 2013 by HSBC Insurance Holdings Limited, London. Published by HSBC Insurance Holdings Limited, London Designed and produced by Global Publishing Services HSBC Insurance Holdings Limited 8 Canada Square London E14 5HQ 18