Canadians are going to outlive their savings!
The World Economic Forum published a report that looks at the current rates of saving and compares that against expected life expectancy. The good news is that life expectancy is increasing in almost every country in the world, including Canada. The bad news is that savings isn’t increasing with life expectancy
Let’s break it down. First the good news. Life expectancy for women in Canada has risen to over 85 years while that for men is a couple of years less than that. In Japan, life expectancy for women is now over 90!!!.
Now the bad news. Unfortunately, the World Economic Forum calculates that, on average, Canadians have only 9.3 years of savings, which will run out around age 73 (retirement age is assume to be less that 65).
Why do we have this gap? As with any problem there are a number of issues including:
Starting too late to save – Most of us put off saving until we are in our 40’s and 50’s, losing the advantage of compounding interest/returns and making it impossible to save enough.
Underestimating spending at retirement – While you won’t have to buy any more work outfits, most people spend 75% of their pre-retirement spending after retirement. So if you are spending around $50,000 per year in after tax money before retirement, that number will still be $37,500 after retirement – a lot more than most people think. More here.
Overestimating income from governments – Old Age Security (OAS) and Canada Pension Plan (CPP) will only pay out between $14,000 and $20,000/year, well below what most of us need to live in retirement. More here.
Overestimating return on existing investments. We are to be forgiven if the financial industry leads us to believe that 10%+ returns are normal for a retirement account. But the reality is that most people are using a diversified portfolio of stocks, fixed income securities (bonds) and cash. The S&P 500 has returned just less than 10% over its lifetime. Adding in even a small percentage of lower performing assets (bonds and cash), it is easy to see why most people are really getting only 5-8% returns.
What do we do to close the gap? Like the problem, there is not one solution to the retirement gap problem unless you have a rich relative. Unfortunately, the answer is not very sexy and just involves following the good practices we lay out on our site. But if you are in sight of retirement, it might be time to cut out that latte every day and invest the money in Starbucks instead.