Future retirees may face “steep decline” in living standards

Those born in the 1980s will face a 30% drop

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Millions of Canadians may face a “steep decline” in living standards once they retire, according to a report by the deputy chief economist at CIBC.

Benjamin Tal says that dire stats indicate that a change in the retirement income system is necessary.

While a portion of Canadians close to 65 “are on a path to the retirement of their dreams,” those who are younger and those in middle-income brackets are not, according to Tal.

The report notes that in total, about 5.8 million working age Canadians will see a more than 20% drop in living standards post-retirement.

With lowered costs of living factored in, Canadians born during WWII and baby boomers will see nearly 100% of their pre-retirement income—meaning their standard of living will be unaffected.  However, the report states that the children of baby boomers—the millennial generation—will be much less fortunate due to reduced private pension coverage and lower savings rates.

There has been a 23% decline in private defined benefit pension plan coverage in 10 years (from 2001 to 2011), as workplace pensions are not as widespread as they once were.  Also, low bank interest rates mean that Canadians who are trying to save for retirement in the next few decades are not building their wealth as easily as their parents did. Finally, high personal debt levels from larger mortgage payments and student loans are also distracting younger Canadians from focusing on saving for their golden years. A 2013 BMO study revealed that 46% of young Canadians are more concerned about paying down debt than saving for their retirement.

These factors all contribute to why nearly 60% of Canadians born between 1985 and 1989 and almost half of those born in the late 1960s will end up with a below 80% retirement income, according to Tal.

In fact, those born in the 1980s will see 70% of their current income once they retire, meaning they will face a 30% drop in living standards.

In contrast, an average 70-year-old today has enough income to maintain the standard of living they enjoyed before retirement, having benefited from RRSPs, OAS and workplace pensions, writes Tal in the report. These options still exist for younger Canadians—it’s just up to them to actually take advantage of the services. A recent study by TD found that 47% of Canadians polled aren’t contributing to a Registered Savings Plan at all.

That’s why for future retirees, the government is considering the option of increased mandatory or voluntary contributions to the CPP. The change means Canadians could be forced to save for retirement and may receive higher pay-outs when they enter their golden years.

Whether the proposed changes are approved or not, an adjustment to the current system needs to happen, says Tal.

“The time to act is now.”

5 comments on “Future retirees may face “steep decline” in living standards

  1. I am 30 years old and my fiance is 28 years old. Our parents instilled in us that saving minimum 15% of your paycheck is imperative and keep mortgage debt manageable but be debt free as much possible otherwise.

    We have now $45,000 in RRSP’s, $49,000 in TFSA’s, $60,000 in RRSP’s, $40,000 in TFSA’s and $90,000 as cash in a higher interest savings account. We are saving now at a 20% savings rate which includes RRSP tax refunds.

    We just bought our first house and will have a $325,000 mortgage after our $80,000 down payment from our cash savings. We will be saving and investing about $3,200 a month after all our expenses. This includes about $550 a month from our RRSP tax refunds.

    We are aiming for a 4.5% annual rate of return which we are currently achieving from corporate, provincial zero coupon bonds and dividend paying equities, ETF’s. This would get us to our $3,500,000 to $4,000,000 goal by retirement in 30 to 35 years. We will also be debt free too in 15 to 18 years, maybe sooner.

    Many Canadians are too much in debt and did not think things through when they took on this debt. This is the biggest impediment that Canadians face to try saving, investing these days.

    Reply

  2. “In fact, those born in the 1980s will see 70% of their current income once they retire, meaning they will face a 30% drop in living standards.”

    Ok there is the first mistake.Or are you trying to say that they will still have 100% of the expenses that they have while working?I doubt it.Less gas maybe downsize from 2 cars to 1, less new clothing etc. Come on this has been shown before and it’s probably wrong to assume what the author is trying to preach. You can do better than that.

    Reply

    • PVJ: Yes. The report author does seem to assume that expenses may be the same. And, yes, this may be an erroneous assumption.

      Reply

    • Additionally, if they can retire debt-free (which they really should strive to do), their income needs will be lower. The need to save for retirement will also go away since they will be retired.

      Receiving 70% of pre-retirement income in retirement isn’t that bad at all, IF one wasn’t spending 100% of pre-retirement income to support one’s lifestyle.

      Reply

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