Actuaries on CBC

Most boomers aren't saving enough for retirement, actuaries say
Last Updated: Thursday, June 14, 2007 | 5:00 PM ET
CBC News

Only a third of Canadians hoping to retire in 2030 are saving enough to guarantee a comfortable retirement, according to a new study that looked at how baby boomers will likely fare in the decades to come.

"The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," said Normand Gendron, president of the Canadian Institute of Actuaries, which sponsored the study.

The findings were not encouraging for many of those born in the early to mid-1960s. People in that age group who are counting on only one kind of savings to fund their retirement will likely have to work past age 65 or increase their savings to avoid financial hardship.

The study — which was carried by a research team at the University of Waterloo — found that it tended to take some combination of personal savings, RRSPs, company pensions and home ownership to fill the gap left by the "modest income base" provided by such government retirement plans as the Canada Pension Plan and Old Age Security.

Growing equity in a home is an important retirement savings tool, the authors said. So many boomers will likely need to count on their homes to help fund their retirements, the study's authors recommend that mortgage interest on a principal residence be made tax deductible, as it is in the United States.

"We found that home equity can make a significant contribution to narrowing the gap, provided your home is paid for when you retire," said Steve Bonnar, one of three actuaries who directed the study. "Yet while home equity is important, on its own, it is not enough to close the gap."

The study's findings — that most boomers are off course for a well-funded retirement — are at odds with the perceptions of the boomers themselves.

A survey the actuarial body carried out in April showed that 55 per cent of Canadians aged 40 and over feel confident they'll have enough accumulated to retire comfortably.

The actuaries' figures suggest that many Canadians will get a nasty surprise once they leave the workforce.

"Many people don't have a good grasp of how much money it takes to pay for a comfortable retirement," Bonnar told CBC News Online.

He cited an actuarial rule of thumb that it takes $20 of capital to provide $1 of annual pension income. Assuming it takes $23,000 a year to pay for necessary living expenses, that means it would take almost $500,000 to provide that, he said. That can come from a mix of personal savings, home equity, or a company pension plan. Only part of it will come from government retirement programs.

"There's a message for those in their 20s and 30s," Bonnar said. "That is to think broadly about saving for retirement. You can't start saving too early."

So I did some research and apparently "Stephen P. Bonnar" is from TP in Toronto. His comment intrigued me quite a bit: how the heck did he get to that figure? Googling revealed an article at StatsCan which confirmed my memory that the current life expectancy for men and women is about 80. So assuming a normal retirement age of 65, that's only about 15 years of pay outs. Hmmm.

I obtained the UP94 (male) table along with the AA projection scales (male) from the SOA website. At work we usually project to 2015 so that's what I did too. The result I get at any reasonable interest rate is definitely less than 20. I should also mention that UP94 with AA_21 says an age 65 should live to about 83.

I finally got something close to 20 when I decided to assume that there is no interest and there exists an inflation of ~2%.

Eureka.

I knew the $20 figure is absurdly high from the beginning and is way too conservative. A statement that's more realistic and surprising is $1 saved in your early twenties is equivalent to $1 of ANNUAL pension income.