Retirement saving is the obvious cut for households struggling to stay centred financially while interest rates rise and inflation keeps burning up more income.
The 2022 Canadian Retirement Survey by the Healthcare of Ontario Pension Plan (HOOPP) highlights the precariousness of retirement saving right now. Almost four in 10 working people did not put away money for retirement in the past year and 72 per cent said saving for retirement is prohibitively expensive.
Chatter about Canada being on the verge of a retirement saving crisis has been around for decades. Between rising rates and inflation, are we finally there? Is life getting too expensive for retirement saving?
It sure looks that way for many people in mid-2022. In the HOOPP survey, 32 per cent of the 1,716 participants described themselves as falling behind in their standard of living and 63 per cent agreed they will have to push out their retirement date if inflation keeps rising. One in four said they would have no money to save if the cost of living pushes higher.
Many people are in a short-term affordability emergency right now. They need funds to cover the rising cost of mortgages, groceries, gas and so much more that goes into the daily life of a family. Saving for future events like retirement seems an unaffordable luxury.
If financial stress is a problem in your household, take a retirement saving break for 2022 and even 2023 if you need it. But eventually, you’ll need to get back on track. If a large amount of people are never able to do that, then we definitely have a retirement crisis in the making.
Inflation’s effect on retirement saving seems a near-term problem in that rising interest rates will eventually bring price increases down to prepandemic levels around 2 per cent. But a lot of the stuff we buy regularly may never go down in price. Only wage increases above inflation will help people get ahead and these are rare. The average wage increase is running at roughly half the inflation rate.
Rising rates could bake higher expenses into family finances for years. With a fixed-rate mortgage, you are locking in today’s higher payments in for whatever term you choose. From that perspective, the familiar old five-year fixed rate mortgage doesn’t look great.
Higher mortgage costs also make houses less affordable to buy, which is itself a retirement problem. In no way does a home guarantee a financially secure retirement. But if you do own one, you have a valuable asset to sell in order to free up money for retirement costs like care provided through in-home services or nursing homes.
In the HOOPP survey, 75 per cent of non-homeowners under age 35 worried that rising interest rates would prevent them from affording a home, and 75 per cent of owners in that age group worried about their ability to afford current or future payments.
The irony of today’s retirement savings challenge is that now is the best time in ages to invest money for the long term. Both stocks and bonds are well down in price, which in retail terms means they are marked down and on sale. Adding money to a diversified portfolio in biweekly, monthly or quarterly instalments over the next 12 months could work out very well 12 years and more in the future.
A retirement crisis, if it actually occurs, will not announce itself. We’ll only notice it in rising numbers of seniors working for income and not for fulfilment, in a reversal of the impressive progress made in reducing poverty among seniors and in rising costs for the federal government through payments of the Guaranteed Income Supplement for low-income seniors.
A return to normal inflation levels and an interest rate reversal would help avert this crisis, but we have a broader affordability problem to contend with in the form of lifestyle inflation. Marketing and social media stoke a hunger to own and do more. Finding the “enough point” in our lives is getting harder to do.
Quantum improvements in retirement saving have been made in recent decades, including some great investing products available at costs that can be very close to negligible. The next challenge is getting people to use them more.
More workplace pensions would also help. Is there a better wellness benefit for an employer to offer than a financially secure retirement?
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