Owning a home could make all the difference between millennials having enough money to retire or being forced to work longer than their parents did.
If millennials — who today are in their late 20s to early 40s — rent throughout their working lives, then they must save a lot more than homeowners in order to retire in their 60s, according to the 2023 Mercer Retirement Readiness Barometer.
“This is a generation where being able to retire is one of the top three challenges when we look at unmet needs,” Jillian Kennedy, partner and leader of defined contribution and financial wellness at Mercer Canada, said April 12.
Mercer estimated that a millennial who rents would need to save eight times their salary over the course of their career to be able to retire at age 68. Meanwhile, peers who own a home would need to set aside 5.25 times their salary and would be “retirement ready” at age 65. To arrive at the savings rates, Mercer assumed a starting salary of $60,000 and contributions of 10 per cent of salary per month to a savings plan starting at age 25.
There’s a direct line between homeownership and a quality retirement.
“Homeownership gives retirees flexibility, as retirees who downsize may be able to access a significant amount of money. Renters, conversely, must pay rent every month or face eviction – whether they are 25 years old or 85 years old,” Mercer said in a press release.
Saving eight times one’s salary is “probably not” achievable, Kennedy acknowledged. “If you take a look at the difference, it’s safer to say the homeowner in retirement is going to have better quality of life and a much lower likelihood of running out of assets.”
Mercer defines retirement readiness as a 75 per cent probability of having enough money to last until death. That equates to 66 per cent of pre-retirement income maintained while retired, including government benefits, for a boomer, and 69 per cent for a millennial.
Savings aren’t the only problem. For many Canadians, not just millennials, owning a home is unaffordable.
Economists at National Bank calculated that, nationally, mortgage payments as a percentage of income on a “representative” home stood at 64.6 per cent in the fourth quarter of 2022.
Housing is considered “affordable” when its costs account for roughly one-third of disposable income.
Even Canadians who share living quarters with a roommate or partner struggle with housing affordability, according to a report released April 4 by Toronto-Dominion Bank.
The study found that 56 per cent of Canadians living with a roommate were doing so to save money. Almost 80 per cent also said it would be tough to rent if they were living solo.
Despite all the challenges millennials face, there’s still hope they can retire comfortably, but the path might change.
“The one thing I would say, this a resilient generation and we could see over time they adapt,” Kennedy said.
” Do I have to own a home? Maybe I can rent and own a cottage?’ I’ve heard about co-owning. I think we will see this concept of a linear lifestyle of graduating, getting a job and owning a home completely change. The effect will be felt across society and we will have to adapt to that.”
Credit Gigi Suhanic, The Financial Post