The observation is quite brutal thanks to the young workers who have just graduated. Even if they’re lucky enough to start their careers in a job market full of opportunities, the real estate market could play tricks on them…until they die.
Posted at 1:29 am. Updated at 6:30am.
It is often said that buying a property is a form of forced saving. This is true. No choice to take out the mortgage before going shopping to New York. And one day we are faced with a property of great value that is fully paid off. What a liberation! Mind you, you can also rent out your whole life and put money aside in hopes of a golden retirement.
The problem is that the two scenarios are not equivalent. Even if the homeowner’s and renter’s savings rates are exactly the same, let’s assume 10% for the purposes of the exercise.
According to Mercer, a company specializing in human resources and retirement planning, a young person who is now 25 and has rented their entire working life should save 50% more money than someone who becomes an owner in order to have a sufficient income feature retired. And the tenant has to wait another three years to say goodbye, boss.
Specifically, the owner must save 5.25 times their last salary to retire at age 65 with sufficient income. For his part, the tenant can only reach this financial level if he saves 7.9 times his salary, but this is not the case before the age of 68.
Sufficient income is about 70% of pre-retirement income, with a 75% chance of not running out of funds before death. Government benefits are included in the calculation.
Because “the devil is in the details,” here are the assumptions Mercer uses: Our two young workers start saving for retirement at age 25, with a starting salary of $60,000 indexed by 1% minus inflation . If you live in an apartment, you pay $2,000 a month. The other buys a house for $500,000 (average mortgage rate of 4%). Maintenance costs and taxes are taken into account in the calculation. After retirement, the home is paid off and is one of the assets that can be sold to meet needs.
This is obviously a fictional scenario and every situation is different. A house can quickly become a money pit due to major work required, just as renting can become hell due to neighbors or the whim of the landlord. We can always find exceptions, but this comparison shows how important it is to save as a renter. Because the moment when living costs almost nothing will never come.
Most young people, and probably their parents too, will be put off by these numbers. First, because access to property is a major challenge. Even though they’ve been falling for months, house prices are still significantly higher than before the pandemic and mortgage rates haven’t been this high since 2008. The idea of having to save 10% of income, on top of that. Other financial commitments also seem out of reach.
It would be a lot easier to aim for half or 5%, wouldn’t it? The good news is that the gap can often be filled through your employer’s retirement plan. In Canada, the average contribution from companies is “5 or 6%,” specifies Jean-Philippe Côté, investment advisor at Mercer.
However, TFSA or group RRSP plans, which are becoming more common, are not mandatory. “With our customers we see an employee participation rate of 60 to 70%. »
At least a third of employees are therefore leaving money on the table. This is a pity. Because a $1 contribution that turns into $2 is an instant (and unbeatable) 100% return!
A new trend is emerging to counteract the “sluggishness” of employees. “When it comes to recruitment, we are seeing more and more pension funds that standardly charge the employee 5%,” reports Jean-Philippe Côté. An employee who does not wish to participate at all can then request this. Some plans, including those with defined contributions, also offer the option to deposit more. Sometimes the employer also increases his contribution, sometimes the advantage lies in the low administration costs.
Last year, the average management fee for DC and group savings plans was 0.6%, compared to 1.9% in the retail market, again according to Mercer. This difference is significant after decades of saving. The person who always paid 1.9% must retire four years later than the person who paid 0.6% to enjoy the same amount.
Retirement is a distant dream for young people entering the labor market and is rarely a priority. That’s understandable. But they need support not to hit a wall in their 60s. As companies move away from defined benefit plans that give employees a comfortable retirement with nothing to worry about, they need to redefine their role. The worst idea would be to absolve yourself of any responsibility.