Analysis unpacks long-term advantages of owning vs. renting a home, and how advisors can help young clients
The road to retirement readiness is an uphill climb for today’s millennials, many of whom have been hit by the one-two of rising rates and record inflation as they were most financially vulnerable. And according to new research, it’s an even steeper trek for young Canadians who’ve been priced out of homeownership.
“We're very interested in the millennial generation,” says Jillian Kennedy, partner, Wealth at Mercer. “They really aren't going to enjoy some of the investment returns that some other generations have had to be able to grow their savings. They have increased levels of debt, and they’ll have more difficulty repaying that debt because of interest rates, which just adds to their costs of living.”
In its most recent Retirement Readiness study, Mercer did an analysis based on two hypothetical millennial personas: one owns their home, while the other rents. Both were modelled assuming they started saving part of their income at age 25, with a starting income of $60,000.
“The average cost of a starter home in Canada, according to the Canadian Real Estate Association, is around $500,000, and the average Canadian renter pays approximately $2,000 a month in rent. So that’s what we used as the underlying assumptions,” Kennedy says.
From there, Mercer examined how long it would take both personas to build up a nest egg that generates 69% of their pre-retirement income. It found millennial renters would have to save eight times their salary – 50% more than their homeowner peers, who’d only need to save 5.25 times their own salary – to reach that level. What’s more, renters wouldn’t be able to reach that bar of pre-retirement income until age 68, compared to age 65 for millennial renters.
“When we look at retirement, we look at the three-legged stool: government benefits, personal savings, and equity,” Kennedy says. “The largest part of the equity component will be someone’s home.”
Aside from a substantial equity boost, Kennedy says homeowners have more leeway to manage their personal financial situation. A renter retiree has to pay rent every month, and an unexpected negative event might force them to draw down from their savings unexpectedly. In contrast, a homeowner can continue to benefit from the equity in their residence.
“As a homeowner, you could enter into a reverse mortgage, you could rent out it, you could downsize – the list goes on,” she says. “With more and more generations following the boomer generation into retirement, I feel like we're going to see that flexibility from ownership increase as affordability continues to be a challenge.”
Mercer’s simulations assumed both millennial personas would save 10% of their salary per month for retirement, which might be a tough sell for many young workers today. Being part of a workplace pension and savings plan could make things easier, Kennedy says, especially if their company plan includes matching contributions, access to lower-cost investment options, and free consultations with an investment advisor.
But even with those benefits within reach, she sees a lot of people are leaving money on the table.
“We see that this generation has struggles with prioritizing retirement. Instead of saying ‘I want part of my pay to go towards a pension plan and have my company match that,’ they may want to concentrate on their child's education or other more immediate priorities,” Kennedy says. “We want our research to be a way of showing you need to prioritize retirement, even if it feels like something you don't have to care about right now.”
With so many competing objectives to consider, she says, millennials today will be much more open to financial planning and advice from a professional who can create a roadmap that hits all their goals. Bonus points will go to those who can strategize outside the traditional formula of life milestones, which Kennedy says is ripe for disruption.
“We’ve traditionally set this expectation that you should go to school and work really hard to get a degree, and get a really good job, and then buy a house, and so on and so on. A lot of people today might have done everything that they were told to do, but still be stuck renting as they can’t afford a down payment for a home,” Kennedy says. “I think we need to recognize that the traditional way of going through the milestones of one's life needs to need to change.”
