Millennials are afraid they won’t have money in retirement

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About 67 per cent of Canadians aged 28 to 44 are afraid they won’t have enough income during retirement, a new report from Canada’s pension investment management organization, reveals.

This is higher than the 61 per cent of all respondents who reported the same concerns.

“Planning for retirement can be intimidating, especially for younger Canadians,” said Frank Switzer, managing director, public affairs and communications at Canada Pension Plan Investment Board, which operates as CPP Investments. “But once you build that retirement plan and once you have a better understanding of the role of (the Canadian Pension Plan), it just provides a roadmap to ensure your savings will last in your retirement years.”

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Dylan Wilson, portfolio manager at Verecan Capital Management Inc., pointed to inflation, the rising cost of living and market shocks over the past few years as major factors that could be making younger Canadians more anxious about their retirement savings.

“You’ve got an entire generation that was raised on cheap money that financed everything, and now that inflation has returned and there’s more uncertainty globally going forward, I can see why people would have anxiety,” Wilson acknowledged.

You’ve got an entire generation that was raised on cheap money that financed everything

Dylan Wilson

There are other obstacles, as well. Switzer highlighted how there has been a decline in the number of Canadians enrolled in defined benefit pension plans over the past 35 years.

The Office of the Chief Actuary reported that the proportion of active registered pension plan members in defined benefit plans declined from 90 per cent in 1989 to 67 per cent in 2019. In the private sector, this had plunged from 85 per cent to 39 per cent, especially as more employers switched to offering defined contribution plans instead.

In a defined benefit pension plan, employers take on the investment risk and are responsible for ensuring there is enough money to fund the pension payouts in the employee’s retirement. However, in a defined contribution plan, the employee shoulders the risk.

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Wilson said people who own a home in Canada’s major metro areas have likely benefited from a significant increase in real estate values over the past two decades, which could allow those without enough savings to tap into their home equity. Home owners could rent out their space for extra funds, or sell and downsize into a smaller place.

However, younger Canadians who either cannot afford homeownership in the current market or are grappling with hefty mortgage payments may not be as confident when it comes to relying on real estate assets for their retirement.

The CPP Investments study further suggested day-to-day financial stress and anxiety about money declined with age. Day-to-day financial stress was 42 per cent for the 18-24 age group and 12 per cent for the 65-plus age group. As for general anxiety about money, 64 per cent of the 18-24 age group experienced this, compared with 33 per cent of those over 65.

On the other hand, retirement planning stress climbed to a peak for the 45-54 age group — generation X starting to inch closer to retirement — and steadily dropped for older age groups.

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Switzer explained that younger Canadians are grappling with more immediate financial concerns, for instance saving for home ownership or a car. As they age and advance in their careers, they are more likely to be making more money and meeting those financial goals, leading them to refocus their priorities to saving for retirement.

The study found Canadians now have higher expectations of how much money they will require in retirement. The typical amount non-retirees expect they will need each year rose from $50,000 to $55,000, while their expected total savings required climbed from $700,000 to $900,000 over the past year.

Wilson said that because Canadians live longer than they used to, one of the greatest expenses they need to save for is end-of-life care. Prospective retirees need to factor in the costs of making modifications to their homes or moving into an assisted living care facility and any medical costs that are not covered by provincial health insurance plans.

Switzer noted the survey asked people about their familiarity with the CPP, and that those who understood how it works and had a financial plan were less concerned about outliving their savings.

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The CPP retirement pension is a monthly, taxable benefit that is intended to supplement people’s savings to cover everyday costs in retirement. The average payment for a new retirement pension (at age 65) in July came to $815 a month.

In order to qualify for the CPP, you must be at least 60 years old and have made at least one contribution to the pension program. Typically, employees and employers, including the self-employed, pay into the program through paycheque contributions.

“For young people, knowing you have a head start through the CPP can help make saving for retirement feel more achievable,” Switzer suggested. “Behavioural science and financial psychology tells us that being knowledgeable about your finances gives you confidence,” Switzer said. “Once you’ve got a plan, you’ve got the confidence.”

Wilson said it is important for Canadians to start saving for retirement now, even in small amounts. Since younger Canadians have the advantage of time, they can benefit from the power of compounding returns.

He recommended automating savings from paycheques on a monthly basis. For people living paycheque-to-paycheque, he suggested reviewing the largest expenses and looking for ways to cut down on costs.

“Life’s an expectations game,” Wilson cautioned. “Everything you take today, you’re giving up tomorrow.”

• Email: slouis@postmedia.com

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