Don’t panic, says a new report by the C. D. Howe Institute, Canadians are actually saving enough for retirement.
“The greatest challenges come early in their adult lives when the burdens of acquiring a home and supporting young children strain the family budget,” wrote report author Malcolm Hamilton. “After that, things get easier.”
Among the common assumptions about retirement that Hamilton debunks is the need for 70% of your pre-retirement income to maintain your lifestyle in retirement.
“The traditional 70% target is reasonable for young families who want to sacrifice heavily for 20 years so they can enjoy, after retirement, the high standard of living they can expect near the end of their working lives,” he said.
“It is also reasonable for those who never have children or buy a home. But for most Canadians the 70% target significantly overestimates both the income they need when they retire and the amount they must save to get there.”
In fact, Canadians are actually saving more than the reported 5% household savings rate. This low household savings rate, Hamilton suggests, is due to a general reduction in saving unrelated to retirement, an increase in withdrawals from pension plans and RRSPs, and a reduction in the rate of return on retirement savings.
Hamilton also challenged the worries about declining RRSP contributions and the billions in unused contribution room as an indicator that Canadians aren’t saving for retirement. He suggested that combined with tax-free savings account contributions, that may not be the case.
Politicians have raised concerns that Canadians aren’t saving enough for retirement.
Ontario has passed legislation to create its own provincial pension plan, while the federal government has said it will hold consultations regarding a possible voluntary expansion of the Canada Pension Plan.
However, Hamilton says the Canada and Quebec Pension Plans can only go so far in helping.
“They can establish a lowest common denominator — a replacement target that all Canadians should strive to equal or exceed,” Hamilton wrote.
“Beyond that, we need better targeted programs — programs that are better able to recognize and address our individual needs.”