Millennial homeowners said to have easier time saving for retirement

Those of us of a certain age worry about our millennial kids and grandkids, chiefly because of the massive costs they face in order to own a home, and the higher interest (and mortgage) rates they are dealing with.

If there’s a silver lining, it may be that those home-owning millennials will have an easier time saving for retirement than their peers who rent — so says an article in the Financial Post.

“Owning a home could make all the difference between millennials having enough money to retire or being forced to work longer than their parents did,” the article explains.

“If millennials — who today are in their late 20s to early 40s — rent throughout their working lives, then they must save a lot more than homeowners in order to retire in their 60s, according to the 2023 Mercer Retirement Readiness Barometer,” the article continues.

“This is a generation where being able to retire is one of the top three challenges when we look at unmet needs,” Mercer Canada’s Jillian Kennedy states in the article.

The article says millennials who rent “will need to save eight times their salary over the course of their career to be able to retire at age 68.” But a millennial homeowner needs to “only” save 5.25 times their salary to be able to retire three years younger, at age 65, the Post reports.

These figures are based on a millennial earning $60,000 annually and saving 10 per cent of their salary to a monthly savings plan, starting at age 25.

OK, so why are the homeowners able to save so much less?

“Homeownership gives retirees flexibility, as retirees who downsize may be able to access a significant amount of money. Renters, conversely, must pay rent every month or face eviction – whether they are 25 years old or 85 years old,” the Post reports, citing a Mercer media release.

As many of us worrying parents and grandparents already know, the big problem millennials face with housing is its cost.

“The composite benchmark price of a home in Canada rose 87.4 per cent over the last decade to February 2023, according to date from the Canadian Real Estate Association,” the article notes. These days, the article continues, “mortgage payments as a percentage of income on a ‘representative’ home stood at 64.6 per cent in the fourth quarter of 2022.”

Housing is said to be “affordable” when it represents one-third of disposable income, the article concludes.

Things sure have changed. Our late dad used to tell us, when we were kids growing up, that a mortgage should cost no more than “two years’ salary,” and that housing costs were affordable as long as they represented 25 per cent of salary. Those rules of thumb probably worked in 1965 but you’d have to make a heck of a lot of money to be able to follow them today!

The article tells us that even those millennials fortunate enough to enter the housing market still need to save a lot of money to be able to retire at 65 — we assume this is absent a pension plan at work. If you are saving on your own for retirement, check out the Saskatchewan Pension Plan. SPP will take your contributions, invest them in a pooled fund at a very low cost, and — when it is gold watch time — will help you turn your invested savings into retirement income, including the option of a lifetime annuity payment.

SPP no longer sets any limits on how much you can contribute to the plan. You can make an annual contribution of any amount up to your available registered retirement savings plan (RRSP)room. And you can transfer any amount into SPP from an existing RRSP.

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You’re enjoying your retirement party, your last paycheque is about to be deposited, and soon you’ll be cracking into your retirement savings.

All smooth sailing? Well, it can be if retirees are aware — in advance — of some of the bumps in the road ahead. Save with SPP took a look at the most common risks faced by those of us who are retired.

If your retirement savings are invested and you plan to live off the proceeds, investment risk and inflation should be near the top of your list, reports the Financial Post.

“Turbulent markets, soaring inflation and a higher cost of living are all impacting older workers that are transitioning to full or part-time retirement,” Mercer Canada’s F. Hubert Tremblay tells the Post.

The Kiplinger website adds a few more. Will you outlive your savings, the article asks? That’s known as “portfolio failure risk,” and can happen even if you have a set withdrawal rate, such as taking out no more than four per cent of your savings each year.

“Another withdrawal method is guessing how long you’ll live and dividing your savings by 20 to 30 years—but what happens if you live 31 years,” the article asks.

They also cite “unexpected financial responsibility risk” as being a possible challenge — this would involve having to help out adult children or ageing parents — or both.

The Wealth of Geeks blog offers up a few more risks, including a surprising one — frustration.

“Retirees are frustrated with their retirement,” the article notes. “On average, retirees rate their satisfaction in retirement as 7.0 out of 10 in 2022, compared to 7.4 in 2020. Similarly, retirees ranked their alignment of life in retirement with their prior expectations at an average of 6.4 in 2022, down from 6.8 in 2020,” the article continues.

A lot of the frustration is linked to inflation — the fact that everything costs more than it did even a year ago, the article continues. Having less to spend than expected while on a fixed income becomes a source of frustration, the article explains.

Forbes magazine sees three chief risks for retirees. The first two, inflation and investment risk, we’ve covered — but the third is possibly even more important — longevity risk.

“While there are a lot of benefits to living a long time, longevity increases financial risk. You need to pay the living expenses for all those extra years. Also, your annual expenses might increase, because people generally need more medical and long-term care as they age,” the Forbes article explains.

Save with SPP has been embedded in the camp of retirement for more than eight years now, and we can add another risk to the list — carrying debt into retirement.

According to the Canadian Press, via CP24, Canadians have $1.83 in debt for every dollar they earn.

While that’s bad, having debt when retired (and living on less income) is worse. Trying to reduce debt prior to retirement is, in many people’s opinion, almost as important as retirement savings.

It’s a daunting list of potential pitfalls. The best way to arm yourself against future risks is to have retirement savings and thus, future retirement income.

If you have a pension or retirement system through work, you are ahead of the curve. If you don’t, consider the Saskatchewan Pension Plan. SPP is a pension plan any Canadian with registered retirement savings plan (RRSP) room can join. SPP will take your contributions, as well as transfers from other RRSPs, and will grow them efficiently in a pooled fund offering low investment costs. When it’s time to turn savings into retirement income, SPP has several options for you, including lifetime annuities which guarantee you’ll never run out of income. Check out SPP today!

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Canada’s pension system cracks the world’s top 10 – but there’s room for improvement

When it comes to government retirement benefits for its citizens, Canada is certainly world class.

According to The Wealth Professional, Canada has the ninth best pension system among 37 developed countries – this due to a recent ranking by the Melbourne Mercer Global Pension Index.

However, Dr. David Knox, author of the study, sees a few problems for Canada, despite its relatively high standing.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future,” he states in the article.

One of the problems in having a system where retirement savings plans are looked upon as “wealth,” rather than a pot of money earmarked for the future, is that people tend to dip into the account early, Dr. Knox tells The Wealth Professional.

In plainer terms, people look at their retirement savings account, which may contain tens of thousands, if not hundreds of thousands, and dip into it. That’s because, the article advises, “people feel more financially secure and are more likely to borrow (from) their retirement savings pre-retirement.”

Having those relatively fat retirement savings accounts also makes people more comfortable with debt, Dr. Knox states in the article.

“As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt. The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents.”

There’s another problem, the story notes. While Canadians have amassed a lot in retirement savings, there seems to be a discrepancy between the amount saved, and what they will actually need to fund their golden years.

“Canada currently has a US $2.5 trillion gap between existing retirement savings and future retirement needs,” states Jean-Philippe Provost of Mercer Canada in the article. “This gap reflects not only demographic forces, but also the combination of limited access to corporate pension plans for workers and a challenging long-term investment environment. Women are particularly affected by this savings gap,” he tells The Wealth Professional.

So the two takeaways here are this – try to avoid dipping into your retirement savings before you have retired, and be aware that you’ll need to save more than you have saved thus far.

The Saskatchewan Pension Plan has one-little heralded feature that prevents cookie jar raids. Funds contributed to SPP are “locked in,” meaning that you can’t access them until you start your retirement. Your retirement cookie jar remains sealed until that wonderful day when, freed from the bonds of work, you want to turn those savings into retirement income. Be sure to check out SPP today!

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing, classic rock, and darts. You can follow him on Twitter – his handle is @AveryKerr22