“We’ve always lived below our means and have no children,” says Louise, “so it’s been easier for us to save than it is for many people. Neither of us ever had well-paying work (my husband never hit $75,000) but we’ve never had big needs or wants – we spend about $50,000 per year.”
That seems to be enough when you’re in a small Ontario city like Guelph. At least for her and Paul. So on their combined incomes of $150,000 (but no pensions), they’ve saved up a storm despite paying off their home years ago.
Both are in the middle-fifties. They read the post here a few days ago about net worth, and seem a little shocked that the average Canadian (says StatsCan) clocks in at $243,800. As you may recall, a third of that number comes from pension benefits that may or may not be received in the future, and another 30% is in residential real estate, reflecting our bubblicious market and historic values.
“So our net worth number (including a conservative house value estimate) is: $2.45 million. Of that, the house is worth about $350,000, and our after-tax accounts are more than half of the rest.
“Garth – since I like to feel secure, I feel I need to keep earning for a few more years (three perhaps? Do you think that’s long enough?) but my question is: What the heck are “average” Canadians and Americans going to do to make it through their retirement years? I don’t feel wealthy at all, given how many expenses will come our way during the next (possibly) 30-40+ years. But when I see what the typical pre-retiree has saved, I just don’t understand how they’re going to make it. What do you think?”
Indeed. The numbers are sad. At present 72% of Canadians do not have a corporate pension with any defined or pre-determined benefits. Most folks are lucky today if the employer matches them for contributions to a group RRSP, which is then managed by a company flogging mutual funds. Meanwhile real estate values are at record levels, suggesting this will change because nothing goes up forever. Those two items (pension, house) make up two-thirds of average family net worth, which would leave about $80,000 in actual liquid assets.
But as I mentioned, the wealth gap is growing, and the top 20% have net worth of $1.4 million or greater (like Louise, and a lot of people who come here), which suggests mucho middle-class people have far less liquidity and far more real estate equity than the median.
Now, what about retirement?
First, it’s long. Count on twenty years. That could take a lot of dough. Second, you’re largely on your own. The average Canada Pension Plan monthly payment is $611. Big deal. That’s $7,300 a year. Even if you worked your whole life and contributed the maximum (which relatively few do), the biggest monthly is $1,038. Once you hit 65, the Old Age Supplement adds $537 (but clawed back for many). So the average government pension package is a piteous $13,800 a year.
Worse, of course, you might not even get the OAS in the future until you’re well and truly wrinkled and dried up – like age 70. Already the qualifying age has been moved to 67 (for those born after 1963), and you can be sure it will move again.
By the way, the average American social security payment for retirees is $1,294 a month, or more than our CPP and OAS combined. Houses there cost 50% less and retirees have universal health care. Mortgages are fixed (no rate increases) for 30 years, plus people who retire with one can deduct both the loan interest and property taxes from their taxable income.
This may be why US stats look even worse than ours. The average Yank spends 18 years retired, and yet by age 50 has saved just $43,797. The number of people aged 30 to 54 who currently think they are screwed in terms of income after they stop working is 80%. Actually 36% save zero before retirement, and rely totally on government pogey.
So, in summary, Louise is right to worry. Yes, with her $2.45 million and the $150,000 a year in income it will throw off (forever, if invested nicely), she and her squeeze are okay. But society is unlikely to let millions of other middle class people – who foolishly saved too little, bought too much house and will be caught in the downturn – end up on KD and kibble. Given the wealth disparity and current demographics, it’s pretty much assured personal tax rates will rise and benefits like CPP and OAS disappear for all but the needy.
If you know that now, max out your TFSA and invest it aggressively. Think twice about loading up on RRSPs for retirement, which will be sitting ducks for any increase in general tax rate as all proceeds must be taken as taxable income. Stop putting money into assets which pay interest with no potential for capital gains, since rates will stay relatively low for years and the yield is 100% taxed. Focus on returns which come as capital gains and dividends, on which the tax hit is reduced by about 50%. Income split with vigour, most effectively through spousal RRSPs that can be collapsed during years of low income. Sell your house, invest and downsize at the most auspicious time. That could well be now. And understand, above all, that the greatest risk we face is running out of money. Not losing it.
As you know, the people who read this pathetic blog are not normal. Incomes and net worth are far above the herd. Meanwhile there are 85 million Boomers in the US and Canada. Their collective stagger into years of non-work and higher needs will sure be an economic bomb.
Have you heard what’s already being said about ‘eat the rich’? Yikes.