More Canadians worried about retirement as home prices, inflation rise

More Canadians worried about retirement as home prices, inflation rise

MONTREAL — Family time on sun-kissed beaches may feel farther away than ever — and not due to COVID-19.

As worries around inflation, home prices and savings rise, Canadians are losing confidence they’ll have enough cash to retire as planned.

Fewer than half hold a sturdy belief they’ll accumulate enough savings to do so. That’s partly because the average sum they anticipate needing has increased 12 per cent since 2020 to $1.6 million, a new Bank of Montreal survey suggests.

The 44 per cent of respondents with faith in their ability to retire as planned marks a drop from 54 per cent the year before.

Inflation is one driver behind Canadians’ anxiety.

“While it is going to scale back most likely in the future, inflation is still front and centre,” said Robert Armstrong, a director at BMO Global Asset Management. “That is starting to impact their views on how much they need to save for retirement.”

The annual inflation rate rose to 5.1 per cent in January, driven higher by prices for housing, gasoline and groceries, Statistics Canada reported last week. The figure followed year-over-year gains that topped four per cent every month since August.

Housing marks another source of angst.

Home ownership, that keystone of financial stability, appears ever more elusive to younger Canadians, with the average home price rising at a record pace of 21 per cent year over year in January to $748,450, according to the Canadian Real Estate Association.

“The decrease in housing affordability is probably the biggest issue for retirement for younger people or older people that don’t own their house,” said Jules Boudreau, an economist at Mackenzie Investments. “They don’t have that automatic nest egg” — one they can sell without any gains tax if it’s their principal residence.

Like with home ownership, a smaller proportion of younger employees enjoy defined benefit pension plans, which guarantee a set income for post-retirement life.

About one in four Canadian workers were covered by one in 2018, with another seven per cent feeding defined contribution plans, according to Statistics Canada. Coverage rates for both “were still far below those of the ’70s, ’80s and early ’90s, when the rates were consistently above 40 per cent,” Statistics Canada says.

And of workers fortunate enough to have defined benefit plans, “a big chunk of those are the legacy plans of older workers,” said Boudreau.

“So the personal retirement portfolio of a young worker is much more critical, because their retirement hinges entirely on it — and that can create more anxiety, more uncertainty.”

Among new homeowners, however, contributions to registered retirement savings plans may be moderate this year due to mortgage strains.

Younger Canadians may also think twice about pouring money into RRSPs. “They’re thinking about the shorter term — saving for that house, furnishing that house, having that growing family,” Armstrong said, adding that they may opt for tax-free savings accounts instead.

RRSPs make more sense for higher earners who can draw on the account in later years when their income has thinned, allowing them to remain in a lower tax bracket, said Jeet Dhillon, a TD Wealth portfolio manager.

While a Mackenzie Investments survey last year found that only 18 per cent of employed respondents were very confident they’ll have enough income in retirement to live how they’d like, that pessimism may be exaggerated.

Canadians often overestimate the amounts required, Boudreau said.

“When they imagine their retirement, they’re thinking about the first few years of their post-retirement lives. At that time, they’ll have a lot of spending needs — travel, maybe get a cottage,” he said.

“As they get into their 70s and 80s, spending needs will go down.”

Dhillon recommends a diversified investment portfolio for both younger and older workers. Though expected hikes in interest rates may result in stock price drops beyond the 10 per cent fall seen on the S&P 500 since the beginning of the year, investors who are in for the long term can rest easier.

Before settling on an investment strategy, future retirees need to clarify their vision of life after work.

“Gone are those days where people think they’re going to retire, sit on the porch and watch the world go by. It’s more about retirement giving them an opportunity to do things that they maybe didn’t have time to do,” Dhillon said.

“It really does mean different things for different people now, and that’s why it’s even more important to understand, what are you actually going to be doing in retirement?”

Released this month, the Bank of Montreal savings study was conducted by Pollara Strategic Insights via an online survey of 1,500 Canadians between Oct. 26 and 29.

This report by The Canadian Press was first published Feb. 24, 2022.

Companies in this story: (TSX:BMO)

Christopher Reynolds, The Canadian Press

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