Young Canadians Facing Retirement Challenges
Feb 21, 2013
A new report by CIBC Economics raises a cautionary flag with regard to retirement savings and future generations of Canadians.
While the typical 70-year-old is currently able to draw on a mix of income sources (government programs, pension plans and savings) that enables them to maintain the standard of living they had while working, in the future a growing gap will leave close to six million Canadians facing a more than 20 percent drop in living standards as they leave the workforce.
As reported by Benjamin Tal and Avery Shenfeld in “Canadians’ Retirement Future: Mind the Gap,” current trends, if unchecked, suggest that future pensions, government programs and savings rates will be insufficient “to allow today’s working Canadians to realize the retirement lifestyle that their elders have achieved.”
Taking into account the typical drop in expenses in one’s retirement years, the typical 70-year-old Canadian retiring today will have enough income to maintain their pre-retirement standard of living. However, they benefited from a fortuitous combination of factors to be able to achieve this.
Throughout their working careers, savings rates were substantially higher than today, pension plans were more comprehensive, and the public system (with the CPP, GIS and OAS) filled in the remaining gaps. But savings rates have dropped from 15-20 percent as recently as a few decades ago to as little as four percent today.
Combined with this, real returns on both fixed income and equity investments have tailed off significantly over the years. Pensions are less certain and less generous than before, as only one-third of the Canadian workforce is covered by a registered pension plan. And of these, fewer now offer workers the certainty of a defined benefit in their post-working years.
The authors of the study find that while many Canadians (particularly those currently close to 65) are on a path to a comfortable retirement, but millions of others are headed for a steep decline in their living standards in the decades ahead. Nearly 60 percent of Canadians born between 1985 and 1989 and almost half of those born in the late 1960s will end up with a below 80 percent income replacement rate. For those born in the 1970s and 1980s, retirement income will present and even greater challenge.
The good news is that young working Canadians, and their financial advisors, have time to find new directions and plan for the future. But it will be a different world when they reach retirement age.
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