Many Canadians aren’t confident in their ability to afford retirement. According to a 2019 RBC poll, 39 per cent of pre-retirees expect they’ll never have enough money to stop working, and a 2019 Fidelity Investments poll found that 70 per cent of Canadians expect to keep working in some fashion during their retirement.
University of British Columbia economics professor Kevin Milligan says it’s harder to save for retirement today than it was in decades past for multiple reasons.
Since the 1980s, there has been a steady decline in employer-supported pension plans. In 1980, 46.1 per cent of employed workers had an employer-sponsored pension plan; by 2011 this proportion dropped to 38.4 per cent.
Not only are fewer Canadians benefiting from these plans but also the investment risk is shifting to the employee.
Many employers are no longer providing defined-benefit pension plans where retirement payments are predetermined and independent of investment returns within the plan. Instead, defined-contribution plans are becoming the norm, where predetermined contributions are made to the plan and pension benefits paid out during retirement are largely dependent on the plan’s investment performance.
The nature of saving for retirement has changed. Michelle Munro, director of tax and retirement research for Fidelity Investments, said she has witnessed a large change in the way people save for retirement, from her parents’ generation, who were set for life with a defined-benefit pension, to people like herself who have had to invest and manage their own retirement portfolios.
While baby boomers nearing retirement have largely had to plan and invest for themselves, many are able to augment their savings as a result of a housing boom that greatly increased the value of their asset holdings. This is particularly true in hot real estate markets like Metro Vancouver, according to David Lee, a financial adviser for BlueShore Financial. However, few are expecting to see the same level of housing appreciation in the future, and millennials will have to look for other ways to invest for their retirement.
“Things have changed a lot and people need to plan ahead and save early,” Lee said. “We’re not seeing a lot of employer-sponsored pension plans — we’re seeing more people self-employed, and this requires individuals to contribute funds from their own earnings and invest in different asset classes to provide themselves with more growth potential.”
Fewer employer-sponsored pension plans and a real estate market at its peak are not the only factors making it more difficult to retire, according to Milligan.
“We’re in a world of very low interest rates and low rates of return,” Milligan said. “Because yields are lower, you have to have a bigger stock of savings in order to accumulate a big enough pile for retirement.”
The macroeconomic effects making retirement affordability more challenging aren’t limited to lower rates and real estate woes. Stagnant wages are also affecting people’s ability to save. Canadian median wages peaked during the mid-’70s and have been relatively stagnant ever since.
British Columbians seem to be in a worse spot than other Canadians when it comes to saving for retirement. According to the Fidelity report, 39 per cent of British Columbian pre-retirees’ debt has risen over the past few years, the highest in the country. British Columbians are also most likely to expect their household’s well-being to decrease. Interestingly, despite the negative retirement outlook for people in B.C., they are the most likely to want to retire early.