A recent Pew Research Center report stated that on January 1, 2011, the oldest members of the American Baby Boomer generation celebrated their 65th birthday. The article went on to say that every day for the next 19 years 10,000 American baby boomers would reach age 65 and it went on to paint a dire picture for our neighbours to the south given their aging population and unfunded Social Security and Medicare liabilities.1
And then, just this week (July 10th) the LA Times reported: “Retirement funds: An earlier online version of this article said Americans are a collective $6.6 billion short of the amount they need to retire comfortably, according to a 2010 study. The correct figure is $6.6 trillion." 2
Being relatively confident that we Canadians could not be headed down the same path, I looked for data to support my hypothesis. Unfortunately, I think we (like our neighbours to the south) may be headed for that perfect storm.
Currently, every single day more than 1,000 Canadians reach the age of 65; that began on January 1, 2011 and will continue through until 2030. In fact, the number of seniors in Canada is projected to increase from 4.2 million to 9.8 million between 2005 and 2036, with the “senior” share of the population expected to almost double, increasing from 13.2% to 24.5%.3
In 1970, Canada’s old-age dependency ratio was around 13, which meant that every 100 people of working age had to support about 13 retirees. That ratio grew to more than 19 by 2008, and the trend is expected to continue in the coming decades.4
With Ottawa’s pension obligation in 2011 at $227 billion5, what will that pension obligation look like in 2036 when one in four Canadians is over 65? Are you confident that when you’re ready to retire there will be publicly funded pensions available and, if there are, that those funds will provide anything more than a poverty level of existence?
Let’s assume that the percentage of Canadians currently without a corporate pension (73%)6 remains the same in 2036 when it is estimated that there will be 9.8 million Canadians over the age of 65. That translates to over 7 million Canadians looking to receive some form government pension and/or assistance.
But wait, there’s more. If you are not able to save enough for retirement (like 40% of Canadians)7 or are part of the 50% who have no retirement savings8, how long are you going to have to delay your retirement? And then, if you have a mortgage when you retire (like four in ten current retirees)9, what is your standard of living going to be like given that currently, for individuals retiring without a company pension plan or RRSP, the average CPP payout10 is $527.96 and the average payout for OAS (Old Age Security) is $510.21?
3 Possible Options plus 1
Option #1. Diligently build your retirement fund (in whatever form you choose). Let’s assume that at the point of retirement you want/need $4000 per month (before taxes). To generate that amount of money each an every month (without reducing your principle) you would need to have accumulated $1,200,000 (assuming an interest rate of 4%). However, if you want/need $10,000 per month (before taxes) and assuming the same 4% interest rate, you would need to accumulate $3,000,000.
How much time do you have before your projected “retirement” date? Do you currently have that extra amount of money month after month, after month to make that level of contribution to your savings?
Option #2. Invest in property (commercial or residential) that you can rent out that will generate a positive cash flow of $4000 or $6000 each and every month. This means that the rent must be sufficient to exceed all expenses (mortgage, maintenance, etc).
Option #3. Build a business that will pay you a residual income of $4000 or $6000 per month. These businesses do exist.
Optional Option. Win the lottery.
We’ll be discussing each option in coming articles.