Baby boomers come up short for retirement

Canada’s baby boomers are starting to realize they don’t have as much saved for retirement as they will need in order to live comfortably.

By Peter Boys

The Financial Coach

Canada’s baby boomers are starting to realize they don’t have as much saved for retirement as they will need in order to live comfortably.

That was highlighted in a recent study that found that the average baby boomer anticipates they will require at least $658,000 each to feel financially secure. However, with current savings only at an average of only $228,000, there’s a big shortfall.

Almost 50 per cent of boomers today aren’t confident that they’ll be financially secure in retirement, up from 20 per cent who felt this way in 2006. And as they prepare to head into their retirement years, many are discovering they have little time to catch up.

Back in 2009, a Statistics Canada report found that the average senior couple spent $54,100 a year on retirement living expenses. If we look at average historical investment returns, and the need for boomers to have sufficient savings to sustain a withdrawal rate of four per cent annually, their retirement savings should equal about 25 times the size of their combined annual withdrawals.

That means that in order to generate $54,100 annual income for retirement, a retired couple would need to have saved about $1.35 million in 2009. Factoring in four per cent annual inflation going forward to 2013, this number jumps to almost $1.6 million to match their 2009 income need.

The report found that to make up for their lack of retirement savings, many boomers are looking at other ways to cover their shortfall.

Seventy-one per cent said they plan to take on a part-time job, 44 per cent said they will sell off collectibles or other possessions they don’t use, 32 per cent expect to sell their home, and 19% said they plan to rent out part of their home.

What gives this even greater urgency is today’s abysmal fixed income investment returns. Consider 2.5 per cent annual interest from a five year GIC, and low bond rates that were previously considered safe investments for retirees.

These rates have been decimated by today’s central banks historically low base rates, kept low in an attempt to stimulate the struggling global economies.

These studies’ findings should be a wakeup call to younger Canadians, that they need to think beyond their immediate day-to-day financial needs and have an eye on their future, particularly in building funds for their retirement years.

Plus as the huge wave of baby boomers begin to retire, it will put an incredible strain on our already over-extended health care system and government coffers at all levels. The result will be either large tax increases to generate more revenue, or very significant cut backs to services.

It’s my belief that young people today need to look at both significantly increasing their level of savings for their retirement, and also have some level of self-funded long term care in place so they don’t run out of money once retired and aren’t 100 per cent reliant on government for quality nursing care once they reach that stage of their life.

— Money Talk