In an interview with CanadianSME Small Business Magazine, Jillian Kennedy, a partner in Mercer’s Wealth business and leader of the defined contribution and financial wellness strategy for Canada, shed light on the key findings from this year’s Mercer Retirement Readiness Barometer (MRRB) and how it might influence current retirement planning strategies. Jillian explained that younger generations face a unique financial burden, often split between paying down debt in a high-interest-rate environment and saving for retirement. The MRRB suggests that focusing ondebt reduction could lead to a more favorable retirement outcome, potentially delaying retirement by only one to two years, compared to trying to balance debt and retirement savings. This strategy, according to Jillian, can significantly impact retirement planning by helping younger individuals save more in the long run.
Jillian is a partner in Mercer’s Wealth business and is responsible for leading the defined contribution and financial wellness strategy for Canada. She is also a member of the Wealth Leadership Team and works closely with Mercer’s global teams. Jillian’s main practice area is in supporting defined contribution pension plans and savings plans for plan sponsors and plan members. From plan design to investments, service provider management and ongoing governance support, Jillian applies a holistic approach to proactively manage plan sponsor objectives and improve the overall financial wellness of employees.
Jillian has been with Mercer for more than 17 years and has been supporting plan sponsors and members to achieve better outcomes in retirement savings for more than 23 years.
Jillian, could you share the main headline from this year’s Mercer Retirement Readiness Barometer (MRRB) and explain how the findings might influence current retirement planning strategies?
This year’s MRRB focuses on the financial demands placed on younger generations as they are faced with paying down debt in a high interest rate environment and saving for their future retirement. The findings show that if a younger individual were to split their disposable income between paying down debt and saving for retirement, this could potentially delay their retirement by one to two years compared to focusing solely on paying down debt in the short term. While people have been encouraged to save a portion of their pay cheque for retirement steadily over their working career, the MRRB analysis shows that in today’s economic climate with elevated interest rates, a sample 30-year-old with $30,000 of personal (non-mortgage) debt, could retire one year earlier with $125,000 more in savings if they focus entirely on paying off debt within 10 years, before shifting their focus to saving for retirement.
Many people think that if they have not started saving for retirement by age 40, they have failed, but the latest analysis shows that if a younger person is diligent about paying down debt as a priority, they still have time to accumulate savings and may actually end up in a better position at retirement. It may make more sense to prioritize debt payments over saving when the interest on debt is higher than the expected return on investments. Paying off debt can be effectively saving for retirement.
In terms of enhancing retirement outcomes, what impact have you observed from employer matching contributions in workplace retirement and savings programs? How significant are these contributions in the broader context of financial wellness?
In the MRRB analysis, if the same sample 30-year-old has access to a workplace retirement and savings program with 100% matching contributions from their employer, they could retire two years earlier with an additional $250,000 in retirement savings at age 65, if they prioritize paying down debt early rather than focusing on retirement savings from age 30.
When employers provide matching contributions to a workplace retirement and savings program, employees have the opportunity to accumulate more savings. Employees are also often more engaged when there are matching contributions from the employer since there is a shared sense of responsibility when it comes to saving.
Beyond matching contributions, what are some innovative ways that employers can further support the financial wellbeing of their employees?
Some workplace retirement and savings programs are starting to evolve in recognition of supporting the importance of financial wellbeing with a more personalized approach. As the financial needs of employees can vary, we are seeing the concept of flexibility being introduced to workplace programs. For example, allowing employees to direct their own savings to a Tax-Free Savings Account (TFSA) or non-registered account where funds can be withdrawn for debt repayment, while still directing matching employer contributions to a traditional pension arrangement provides some flexibility. Under this example, employees have the option to withdraw their own contributions when needed to address immediate financial needs, while knowing that their employer is still contributing towards their future retirement. Employers adopting plans with this type of flexible design are noticing higher employee engagement and financial literacy.
How important is financial literacy in effective retirement planning, and what steps can employers take to improve this among their workforce?
Financial literacy is extremely important not just in supporting employees with effective retirement planning, but also in helping employees with managing their day-to-day finances. Employers can start with evaluating the current state and effectiveness of their workplace retirement and savings program, as well as the financial wellbeing needs of their employee demographics. This evaluation can help identify areas to address through the structure of the workplace retirement and savings program, or through targeted education and communication geared to different employee segments or life stages. Various digital tools and financial planning services can also support employee financial literacy, although employers should assess the appropriateness of these tools and services.
Under what circumstances can high interest rates be advantageous for individuals planning for retirement, and how should they adjust their savings strategies in response to changing rates?
While high interest rates can be a financial burden when debt is involved, high interest rates may actually be beneficial to someone who is retiring if they are looking to buy an annuity to provide retirement income. Based on this year’s MRRB, a sample 65-year-old retiree with $500,000 in accumulated savings who purchased a single-life annuity back in January 2024 would have $3,500 more in annual retirement income versus investing conservatively in a retirement income product. However, if interest rates fall by 1.5%, the sample individual would have $1,700 less in annual retirement income with an annuity. It is important to note that purchasing annuities may not be advantageous for long if interest rates fall as they are expected to do later in 2024. While there are windows of opportunities for retirees, this will require financial literacy or support through a qualified advisor to navigate through the various retirement income options.
