For majority, retirement is a pipe-dream: Study

If today’s 40-year-olds want to have the retirement they expect, they can’t rely on their employer or the government to make ends meet. Instead they are going to have to drastically change their savings habits, concludes a study released by the Canadian Institute of Actuaries.

The study, entitled Planning for Retirement: Are Canadians Saving Enough? was conducted for the CIA by a research team from the University of Waterloo’s Department of Statistics and Actuarial Science. Through the month of April, the research team developed a total of 72 household profiles to assess whether Canadians who were born in the early to mid-1960’s, who represent the tail end of the boomer generation were prepared for retirement.

Normand Gendron, president of the CIA, says that the study found that generally, they are not. Gendron adds that this new study with a poll conducted by Pollara Inc in April that his organization commissioned shows there is a large discrepancy between what this group thinks their retirement will look like and their actual financial reality.

In fact, the figures might be considered staggering by some. The CIA estimates that in order to maintain their current standard of living, boomers will have to earn an income in retirement that is approximately 70% of their current income. Assuming that the next 25 years have relatively low inflation, the CIA says that a 40-year-old single person making industrial wage would have to save 38% of his or her income per year in order to retire comfortably at age 65 in 2030. Someone making $80,000 would have put away 42% of their income over the same period to maintain their living standards.

Robert L. Brown, a professor at the University of Waterloo, says that even the most miserly of savers will have trouble meeting that type of savings regimen, but there are a few factors that can greatly increase retirement income.

The majority of those studied tended to have savings through a combination of client-sponsored pension plan, RRSPs and home equity (the study did not look at non-registered investments). Brown says the boomers with the biggest leg-up in savings are those who are members of a defined benefit pension plan and those who have significant equity in their home.

The study found that those who manage to remain in a DB plan until age 65, will likely be able to cover their basic expenses purely through a combination of their pension and meager government old-age benefits.

DB plans, though, are increasing a luxury that fewer Canadians will have access too. The study found that utilizing home equity will likely become the most important retirement-income generator for many Canadians, since 69.5% of Canadians 65 or over own a home, and 88% of them are completely mortgage-free. In many of these cases, there has also been a significant capital gains growth that a retiree can additionally draw on.

“There is quite a remarkable difference when home income is put in,” Brown says. The study found that those who had a profile in paying down their mortgage over RRSP contributions were in a better position to generate a higher income in retirement.

The CIA believes that there has to be greater awareness about the value of home equity in funding retirement. This has led the CIA to advocate that the government make interest on principal-residence mortgages tax-deductible to make it easier for Canadians to generate equity in the home.

The CIA says this would be beneficial in two ways. First, it would reduce the amount of money that Canadians would have to pay to grow their home equity which would mean they would have more expendable income for retirement. Second, the mortgage could be used as a quasi-forced saving schedule since the majority of mortgage holders are fairly diligent in making their payments, but don’t have the discipline to put a proportion of their earning aside.

Brown also emphasizes that 65 is not a set-retirement date and that by working past 65, boomers can maximize their savings. He expects that many boomers are going to work well past 65 because there will be strong financial incentives: employers will offer more to hold on to experienced workers in a declining labour market, and working longer can substantially reduce the amount they will need for retirement.

“Late retirement is another powerful option,” Brown says. “For example, if you make $40,000 a year and you retire at 68 rather than 65, you only need to save 10% of your income per year, rather than 14%, to cover your basic expenses in retirement.”

Ultimately though, the CIA says there needs to be more awareness about saving beyond just banking that the steady capital growth of a home will provide income in retirement. The CIA warns that the consistent capital gains in homes may be nearing an end as the same demographic of boomers who have fueled housing prices will likely look to downsize.

Bonnar says educating Canadians early about the importance of retirement planning is crucial. One of his proposals is that the Canadian education system consider implementing investment education at the high-school level.

“There is a fundamental lack of education about the basics of financial planning,” Bonnar says. “With this study we’re starting 25 years from retirement and its evident that it may not provide enough time to save properly.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/15/07)

Mark Noble