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rob carrick


The question we have to ask about every good news personal-finance story is whether the young adults of Generation Y are part of it.

In some cases, the answer is no. The housing market is crushing Gen Y, not making it rich. And it also looks like these 20- and 30-somethings won't be as well off in retirement.

There's a developing narrative that, far from having a retirement crisis in this country, most people are doing okay in saving for their senior years. The consulting firm McKinsey & Co. surveyed 12,000 households recently and found that 83 per cent of people should be able to keep their standard of living after they stop working. McKinsey principal Fabrice Morin said retirement preparedness didn't vary a lot among older and younger age groups. "But projecting the situation in retirement of someone who is 55 or 60 today can be done with a lot of accuracy or confidence," Mr. Morin said in an interview. "With someone who is 25 or 30, any study will have a greater factor of uncertainty."

So let's take a closer look at how young adults are likely to fare in retirement saving. Our guide is Fred Vettese, chief actuary at the benefits consulting firm Morneau Shepell. Mr. Vettese also believes that worries about retirement saving are overdone, but he limits this view to recent retirees and people who are a decade or two from leaving the work force. "Young people are definitely going to have some challenges," he said.

One issue concerns Old Age Security, which right now maxes out at a modest but still useful $6,764.88 annually. Starting in 2023, the age of eligibility for OAS will gradually rise over six years to 67 from 65. Also, many young people will end up working on a temporary or contract basis and thus have no company pension to help build retirement savings.

Another issue is investment returns from stocks, bonds and guaranteed deposit investment certificates. Mr. Vettese said he's coming around to the view that today's low interest rates aren't just a result of central banks trying to stimulate the economy growth. He believes our aging population is playing a role by constraining economic growth and will continue to do so, thereby keeping rates lower than they have been in previous economic cycles. This is what's happened in Japan, where a fast-aging population has helped to keep rates low for more than 20 years.

Mr. Vettese said a slower-growing economy will also affect what people make in the stock market. "Investment returns being lower are going to be a really big factor for people who are saving for retirement," he said. "Younger people are going to be affected more severely because this is going to go on for decades."

Housing is another reason why Mr. Vettese has concerns about how well young people will be able to save for retirement. Prices have soared in recent years, and that limits the potential for future appreciation. It's unlikely that millennials who buy a house today will have the same opportunities to sell it at a huge profit in retirement, downsize to a condo, townhouse or rental and invest a sizable leftover sum of money.

One more challenge for Gen Y's retirement saving is increasing lifespans. Mr. Vettese said that if these young adults retire at the same age as today's retirees, they'll have to save more because of the high probability they'll live longer.

Two factors work to Gen Y's advantage, one of them a surprise in that it represents a reversal of one of the main challenges facing this group today. Whereas young adults are having trouble today finding career-building first jobs, Mr. Vettese sees a worker shortage taking shape in five to 10 years as a result of the aging population. We've already seen more people delaying retirement to stay in the work force, but he's confident that there will still be additional opportunities for young workers. More good news: A shortage of workers will help boost salaries for young people at rates that exceed the trends of the past 25 years.

Finally, Mr. Vettese expects roughly half of millennials to benefit from inheritances in the years ahead. He doesn't think this money or better job prospects will be enough to offset the retirement saving challenges facing Gen Y, though. "I would say over all that they'll be worse off."

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