Mercer report warns that life-long renters will have to save significantly more of their salary than those that can afford to buy a home
The value of homeownership as an investment vehicle is well known, but with many younger Canadians struggling to get on the property ladder what will this do for their long-term wealth building?
A new report from Mercer warns that life-long renters should be saving a significantly higher share of their income than homeowning peers in order to have an adequate retirement provision.
The 2023 Mercer Retirement Readiness Barometer reveals that millennial renters will need to put aside 50% more of their income than those who own a home.
A millennial retiring when they are 68 will have needed to save 5.25 times their salary for a reasonable retirement pot if they are homeowners. For renters, this jumps to 8 times their salary!
Where homeowners may be mortgage free in retirement and have the option to sell and downsize to release capital, renters have more limited choices.
However, with the current cost of living, both renters and homeowners may find it challenging to save 10% of their income, although the report highlights that employer matching programs make this more achievable.
Taking risks
The report also considered the current financial situation of those already in retirement.
With vulnerability in the economy and capital markets, Mercer says that many in the 65+ age range may be tempted to de-risk their investments after 2022’s poor performance in equity markets.
It suggests that these retirees may be considering trading equities for lower-risk assets such as Guaranteed Investment Certificates (GICs).
“But by taking the potential for asset growth off the table with a properly diversified portfolio, that investor would be significantly more likely to run out of money before the end of their lives – or potentially working additional years to achieve retirement readiness,” the report states.
Even moving money from equities to a guaranteed interest-based investment for 3 years after retirement would increase the chance of the retiree running out of money by 10%. This is in contrast to a balanced portfolio subject to market fluctuations.
Working longer or delaying taking CPP or OAS benefits would offset some of the risk of running out of money. Delaying claiming government payments from age 65 to 70 would reduce the risk by 15% according to the report.
