What If Your Children Can’t Afford To Retire? (Part 1 of 2)

Our analysis shows that if Generation Z stays the course, they might not have the means to retire as their parents did. Here’s why.

When Old Age Security came into effect in 1952, it gave all Canadian citizens aged 70 and over a federally funded pension. The catch? Life expectancy in Canada was only 68.8 years back then, leaving little to no time for seniors to benefit from the program (1).

The age of eligibility was eventually rolled back to 65, and life expectancy accelerated steadily afterward. Matched with a stable job and a predictable retirement income, having a well-defined pension was no longer a pipe dream for Canadians (2).

By the mid-2000s, the average Canadian retired at 61 and was expected to live until their early 80s. The future was promising (3).

THE CLOCK TICKS BACKWARD

And then things started to shift. In the past 15 years, the average age of retirement has crept back up, and the growth rates in life expectancy started to dwindle.

On its own, this phenomenon is not all that troubling. However, the fact that Gen Z-ers won’t be able to count on the classic retirement pillars their predecessors relied on is. A stable job providing a defined benefit pension plan, additional savings, and homeownership are not a given anymore.

Based on the current median age of retirement of 64.6, Generation Z might have to work up to 18 years longer than their predecessors to compensate. And with an average life expectancy of 81,7, a considerable portion of the cohort might get squeezed out of retirement (4).

Gen Z might have an 18 years delay on their predecessors, with an average retirement age of 82.6, and a life expectancy of 81.7. In a nutshell, the average Canadian Gen Z-er might not afford retirement at all.

The following analysis is based on a 23-year-old new grad earning the average salary of $52K a year with a 2% inflation rate on a 40-year horizon. It explains how Gen Z might have an 18 years delay on their predecessors, with an average retirement age of 82.6, and a life expectancy of 81.7. In a nutshell, the average Canadian Gen Z-er might not afford retirement at all.

JOB INSTABILITY & PENSION PLAN: 12-Year Delay

Gen Z is by far the most mobile professional generation. They are three times more likely to change jobs than Baby Boomers. While this phenomenon can be partially attributed to an unstable job market, it is not always imposed on them. Gen Z-ers commonly look for jobs that align with their values, even though it costs them in terms of salary and benefits (6).

And one of those benefits are retirement programs that can be broken down to 3 pillars:

1. Universal government benefits (ex: OAS) — for basic needs
2. The Canada/Quebec Pension Plans — for contributors
3. Workplace pension or personal savings & investments.

The latter — workplace pension or personal savings — is the cornerstone of retirement income. It’s what allows individuals to keep their standards of living going once they’ve left the workforce. But registered pension plans are a dying breed (7).

Also, to attain the same level of retirement security as a registered pensioner, you would have to conservatively put aside $890K (8).

Evidence shows that most people face significant challenges in doing that. Saving money, productively investing those savings, and then converting these funds into a reliable stream of post-retirement income is a task few achieve.

Context: No workplace pension plan
Cost: $890k over 40 years
Delay: 12 YEARS

RISING STUDENT DEBT: 4-Year Delay

Mounting student debt is a relatively new phenomenon in Canada. In 2015, 45 % of bachelor students graduated with significant debt levels (more than $25K) compared to 33 % back in 2000. In the last 10 years, 47% more student loans were disbursed to 31% more students than in the previous decade (9).

The problem with early-career debt is that it drags on and delays everything — building an emergency fund, saving for a home, and keeping up with the loan itself. Three years after graduation, just 34% of graduates had paid off their loans, and it typically takes between 9 and 15 years to pay it off (10).

The average Gen Z undergraduate will come out of university with more than $28K in debt. Easy right? Just pay it off in 10 years at a low 2.5% interest rate, and you will be debt-free in 2030 at a total cost just north of $35K. Well, if that money had instead gradually been invested at a 6% interest rate for 40 years, the opportunity cost stands at $337K (9).

That’s considerable when we know that personal retirement security has a price tag of roughly $890K.

Context: Rising student debt
Cost: $337k over 40 years
Delay: 4 Years

Unattainable Homeownership: 2-Year Delay

The average price of a home in Canada is now north of half a million dollars. That’s a 40 % increase over 5 years — a rate that far outweighs the rise of incomes. 40 years ago, a house cost 4 times the annual salary; today, it’s more than 10 fold, and the 5 years it took to save for a down payment has swelled up to 13 (12).

Homeownership has long been a pillar of retirement planning in Canada. The notion being that homeowners could eventually downsize and live off their appreciated, non-taxable profits. Or it meant being mortgage-free once you’ve left the workforce. Unlike Gen X-ers and Baby Boomers before them, homeownership is no longer an assumed rite of passage for Gen Z-ers. They simply can’t factor it by default into their retirement plan anymore.

Ten years ago, Statistics Canada calculated the incomes generated by the home equity of retirement-age households. The gains realized by retired homeowners are considerable — in their sixties, they have increased revenues of 10% — 13% that gradually increases to 12% — 15% after 70 (13).

If we take the lower end of that spectrum, it amounts to $162k in lost returns over the 17 years Gen Z can aspire to retire. And that’s a very conservative estimate that doesn’t consider the benefits of owning a house during the working years.

Context: Unattainable home ownership
Cost: $162K during the 17 years of retirement
Delay: 2 Years

NOT A PITY PARTY

This is not about throwing a pity party for Gen Z-ers — it’s not all gloom and doom. Things have changed, and this cohort needs to exploit the assets and tools at their disposal.

As a parent, how can you give your children the best shot at a decent retirement? My next article will focus precisely on that. Stay tuned!

Edit: Read Part 2 here.

METHODOLOGY

1. The average life expectancy of 81,7 is estimated from the life expectancy at birth for females (83.9) and males (79.4) in 2010.
2. Compound interest calculations are based on a 6% annual investment return rate.
3. $70K required per year of retirement is based on 70% of the current average salary of $52K adjusted with a 2% inflation rate minus the average old-age security income adjusted with a 2% inflation rate.
4. Limits: our analysis assumes that the current median age of retirement of 64.6 and the average life expectancy of 81,7 remain stable over the next 40 years.
5. Generation Z: Born between 1997–2012. Demographics: on track to reach 32 percent of the global population by 2020–2.5 billion of them — surpassing the number of millennials (6).

REFERENCES

1. Pension Timeline, Canadian Museum of History
2. Canada Life Expectancy 1950–2020, Macrotrends
3. Retirement Age by class of worker, Statistics Canada
4. Canadians born in 2030 forecast to live 4 years longer than the previous generation, CBC
5. New Grad Retirement Report, Nerd Wallet 2015
6. The Job-Hopping Generation: Young Professionals Are on The Move
7. Registered pension plan (RPP) active members by area of employment, Statistics Canada
8. The Value of a Good Pension
9. National Graduates Survey (NGS), student debt from all sources, by location of residence at interview and level of study, Statistics Canada
10. Generation Z racking up more card debt than millennials
11. Generation Z Insights How the Next Generation of Investors Approaches Retirement, Saving, and More, Morningstar
12. Retiring Without A Home, KPMG Canada
13. Incomes of Retirement-Age and Working-Age Canadians: Accounting for Home Ownership, Statistics Canada
14. Who are baby boomers, Gen X, millennials, and Gen Z?

Originally published at https://walo.app on September 15, 2020.