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Canadians Share Retirement Anxiety, but They Shouldn’t

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Retirement planners in the United States have grown accustomed in recent years to reading about America’s growing ‘retirement crisis.’

Turn your attention to our neighbors to the north, and it’s often a similar message. But Canadians are wrong to think they face the same lack of preparedness as Americans, says a major new retirement study. Instead, the message should be one of ‘retirement readiness,’ it claims.

Oh, Canada! What are your citizens doing so right that makes retirement something not to be feared?

In turns out there are two things in particular, said Fabrice Morin, principal at McKinsey & Co., which has just published the results of its study “Building on Canada’s Strong Retirement Readiness” report. One is taking full participation in required retirement pension plans, and the other is enjoying the benefits of government-sponsored healthcare. While the latter is not a viable option for the U.S., American employers and employees alike can learn a lot from the former.

Misery Loves Company

Despite the above differences in the two retirement populations, the McKinsey report acknowledges that the typical Canadian probably has the same misgivings about leaving the workforce as their American counterpart.

“Demographic shifts and rising life expectancy have created a common perception among Canadians that they face a retirement crisis, and that millions will be forced to significantly lower their standard of living when they leave the workforce,” according to the study introduction. “Yet McKinsey’s latest research on the subject shows that a strong majority of Canadian households are actually on track to maintain their standard of living in retirement.”

A strong majority indeed. Illustrating how different retirement preparedness is in Canada versus the U.S., Morin says 83 percent of Canadians are on track to maintain their standard of living in retirement. The study is based on a survey of 12,000 households. Compare that to virtually any retirement preparedness study in the U.S., which collectively agree that most Americans have saved little toward their retirement.

The Healthcare Factor

Morin said that government-sponsored healthcare is obviously a major factor in why Canadians face fewer financial worries in retirement. After all, healthcare costs typically increase for an individual as they move through the retirement period, and reach the highest levels in the last years of life.

With that financial uncertainty largely removed from the equation, the average Canadian retiree can better budget for their expenses.

But the study also looks at how Canadians are responding to improvements in the economy with retirement savings and what lessons can be learned from that.

“This is the second time we’ve done this,” Morin said of the study. “We did it four or five years ago. We’ve done it again quite recently to better understand a number of dimensions, and to see how the situation is evolving with the market showing better performance.”

The Retirement Savings Plan Divide

The key findings of the study are, as in the U.S., that the level of retirement preparedness varies widely among Canadian households, and the great divide is retirement savings plans.

“Fortunately in Canada we have some universal programs that provide a pretty good level of consumption expenditure replacement for the lower income portion of the population,” Morin said. “These programs are equivalent to Social Security in the U.S., but also there is a supplement to that for the very low income retiree.”

“There is also a universal pension plan in Canada that does not exist in the U.S.,” Morin said. “All of these put together give a pretty decent [income] replacement in retirement.”

Morin said that even if the typical Canadian worker does not save for retirement, available benefits provide a strong safety net for most.

“Even if they don’t save, most of them will have enough to maintain a basic level of income replacement, which we set at 65 percent for most of the population, 80 for the lowest income segments,” Morin said.  “Among the mid to high-income households, 83 percent of Canadians are on track; 17 percent are not. In the mid to high-income, its 77 percent who are on track, and 23 who are not. “

The research reveals that most of the unprepared households belong to one of two groups of middle to high-income households:

     • Those that do not contribute enough to their defined contribution (DC) retirement plans or group RRSP

     • Those that do not have access to an employer plan and have below-average personal savings

“Those with DB (direct benefit) plans more often than not are on track, in fact 91 percent of them are,” Morin said. “Those with DC plans are about average of the mid to high income group, with 75 percent on track.”

But again, “when we peel the onion even further, it’s all about the contribution rate,” Morin said. “Those who contribute 5, 6, 7 percent or more per year of their income are generally on track. Those that have access to a DC plan but do not participate, or put only a couple percentage points of their income per year, are definitely not on tract.”

Finally, “of those that don’t have access to a pension plan at work, we find in Canada that there is a segment of households that are ‘healthy savers’. They don’t have access to a pension plan at work but they save quite extensively on an individual basis.”

If there is a strong message for American workers in the Canadian study, it is the importance of maximizing contributions to a retirement plan, Morin stresses.

Perception Versus Reality

Finally, the other most striking finding of the Canadian study was that of retirement anxiety, Morin explains.

“There is a gap between perception and reality,” Morin said. “There is quite a bit of fear in Canada about retirement readiness. We see that the most significant gap is in understanding the role of consumption that one will need in retirement.”

Simply put, individuals need less in retirement, and they should not equate pre-retirement annual savings needs with post-retirement spending habits.

“Contrary to the common perception, the majority of retirees in our sample said they reduced consumption in retirement by choice instead of by constraint. Fourteen percent of households currently retired are spending more in retirement; 53 percent are spending less but do not feel the need to spend more; and only 33 percent said they would spend more but feel financially constrained,” the study concluded.