A wave of Canadians gearing up for retirement will be forced to make “significant” cuts to live comfortably for the rest of their lives, an analysis from Deloitte Canada shows.
The report released Wednesday looked at the finances of 4,000 Canadians between 55 and 64 years old to gauge their “retirement readiness.”
Hwan Kim, a partner at Deloitte Canada, notes this group is particularly large right now with three million Canadians in the baby boomer generation primed to retire in the next decade.
“What we found was quite staggering,” he says of the analysis.
Deloitte Canada found that only 14 per cent of near-retirees are expected to be comfortable in retirement, able to absorb unexpected costs without much stress. These individuals largely have $900,000 or more in financial assets and likely own their own home on top of that, according to the report.
In the bottom percentile are the nearly one million households who are expected to rely mainly on public support such as the Canada Pension Plan in their retirement years. While Deloitte noted that public investments in CPP and other supports have been improving in recent years, being on a fixed income means this group will be “particularly vulnerable” to unexpected costs after retirement.
In the middle are the 55 per cent of near-retirees who will have to make changes to their lifestyles to avoid outliving their financial savings. This cohort is largely made up of middle-income Canadians, including those who may or may not own their home outright.
It’s this group that Kim says has been traditionally ignored by the private and public sector, and to whom more attention will have to be paid to fill in the “readiness gap” — a burden that could make retirement more difficult and see financial stress passed onto future generations.
Kim says these workers should prepare to make “significant sacrifices” to retire in the current economic climate.
“They just haven’t saved enough to be able to sustain their lifestyle, especially against the rising cost environment that everybody is experiencing today,” he says.
How much do you need to retire?
Kim says that much of the discussion around retirement has focused on a single number: the amount a household will need to save to feel like they can retire comfortably.
A Bank of Montreal survey released earlier this year pegged that number at $1.7 million for most Canadians, with fewer than half of respondents indicating they’re on track to save that much.
But Kim calls that approach into question, arguing what matters to most Canadians is not how much they have set aside, but what their income and expenses — their cash flow — looks like in retirement.
Kim says it’s been difficult to peg accurate expectations for living expenses in the current bout of inflation, as the “core basket of goods” such as food and housing has been under the most price pressure over the past year.
Jason Evans, a Winnipeg-based financial planner focusing on retirement transitions, says that even though inflation has been trending down in recent months, it’s “still top of mind” for clients.
He says his approach is to sit down with them to learn their day-to-day expenses now and roll out a series of scenarios for income sources and their personal cost of living in retirement.
“Our personal experience with inflation can vary even family to family,” he says.
Kim says that many Canadians are also failing to take into account how significantly other costs can balloon in retirement. Roughly one in four (26 per cent) households participating in the Deloitte analysis said they were budgeting for long-term care affordability, for example.
Canadians heading into their retirement years may also be underestimating the cost of acquiring insurance for disability and other complications at an older age, Kim notes.
“It is really important to think about your care costs, different factors about your health, and whether you’ll need to actually start setting aside some savings or thinking about how insurance policies work for you for your care,” he says.
Net wealth can also be a misleading figure especially for Canadians who have much of their finances tied up in real estate, which Kim notes has become a critical foundation for many households saving for retirement.
These kinds of issues — a lack of options in the insurance industry for aging Canadians or understanding of how to deploy equity from your home — reflect not the failing of near-retirees, but a lack of innovation and attention from the financial services sector, Kim argues.
He’d like to see banks, insurance providers and other financial services firms work closely with the public sector to deliver new products aimed at improving readiness and easing the transition to retirement.
“I think a lot of Canadians have struggled to save and I think they’ve done the best they can,“ Kim says.
“This is really a hope for the financial services sector, including us, to step up to think about what more can we do so that individuals can actually make better choices so that they’re better informed … and they have more confidence.”
Is it too late to close the gap?
While 10 years may not seem like a long time when it comes to saving, Evans says that when clients come to him with anxiety about their retirement, he reassures them that not all hope is lost.
“It doesn’t seem like a lot necessarily, but there’s a lot of actionable things that a person can do within 10 years,” he says.
One of the benefits of doing a financial audit of your savings strategies a decade ahead of retirement is that by shifting spending habits now, an individual can both save more money over that horizon and end up needing less money overall when they do call it a career, Evans says.
“You get that double benefit,” he says. “That’s really powerful.”
Building up retirement readiness does not necessarily end once you’ve left the workforce, Kim adds. Lifestyle changes might need to come early in your retirement years to make sure your finances don’t run dry before the end of your retirement years.
Kim calls into question traditional wisdom to exit riskier investments and flood into safer, more predictable assets like bonds as soon as you hit retirement.
With many Canadians expecting to live another 20 years post-retirement, Kim says continuing to earn higher returns in the equity market can be critical for keeping pace with the rising cost of living over that time.
A financial planner can also help you to decide which accounts you ought to draw down first in retirement, and when it makes sense to access CPP payments, Kim says.
Evans agrees, noting that for a 65-year-old retiree, delaying accessing CPP even five years can have a substantial impact on the size of payments for the rest of your retirement.
In this sense, he says that what Canadians need for retirement isn’t necessarily about how big your funds are — it’s how you access them.
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