Retiring Boomers are not prepared for retirement
A massive nine million strong, wave of Retiring Boomers born between 1946 and 1965 are about to change the definition of retirement. They have been the most influential generation shaping Canada’s economy as they moved through each stage of their lives and are now at the cusp of redefining the meaning of retirement. The traditional dream of retiring in their dream home to share and enjoy with their children and grandchildren may not be a reality for many retiring Boomers.
Canada’s Historical Age Pyramid
As you can see from the chart below a massive bulge of Boomers will be entering retirement over the next twenty years, with the peak reaching retirement in about ten years. Ill prepared, Boomers are entering a perfect storm, retiring at a time of unprecedented economic uncertainty, market turmoil, ultra-low interest rates, significant debt, no company pension and scant savings.
Source: Statistics Canada
In their article “Boomers headed for choppy retirement waters,” The Vancouver Sun stated that, “there has seldom been a worse time to live off savings. More than 60 per cent of Canadians have no company-based pension plan and with interest rates at rock bottom, the payoff on safe government bonds may not be enough to even keep up with inflation. That means it may take $1 million in investments to generate the same retirement income today as $500,000 would have generated five years ago, analysts say”, Of those without a company pensions, 40% have no retirement savings at all and of those that do, the average retirement savings is approximately $60,000), not sufficient to retire on.
If that is not bad enough approximately 50% of Boomers will be retiring with a mortgage. Three quarters of them still owe at least 40% on their mortgage, and one quarter has paid off less than 25%. I covered this in detail in my article titled “Boomers Face a Day Of Reckoning”.
Instead of saving for retirement many Boomers choose to pour as much of their discretionary cash flow into owning as much home or investment property that they could afford. With historical low interest rates over the past decade they bought more house then they could have afforded in a normal interest rate environment, amassing historical debt loads exceeding 152% of disposable income, the highest in Canadian history, as they enter retirement.
For many their home and investment property became their retirement plan. I outlined this in detail in my article titled “Your Home as your Retirement Plan?” With massive debt loads and little in retirement savings to rely on many of these Boomers will need to downsize to pay off their mortgages and release what equity they can in their homes or investment property to fund their retirement. In fact the leading edge of these Boomers is already downsizing for both financial and lifestyle reasons.
To make matters worse Boomers are already facing strong head winds. The Echo generation (the Boomer’s children) a smaller demographic group have already maxed out on historically expensive (Starter Condos) with minimal down payments at historically low interest rates. I covered this extensively in my article titled “Who Will buy all the Boomer Houses”. They simply will not be there to purchase the Boomers homes as they begin to downsize.
To make matters worse, the overheated housing market has already peaked and is showing signs of cooling, just as Boomers are retiring retire and begin to downsize. Garth Turner, financial journalist, author and former Member of Parliament, in a recent Financial Post article titled “Tepid sales numbers spur call to cash out of housing market” had this to say: “This is probably just beginning of the decline in some of the country’s major real estate markets. I think it might be over. March, April would have been the time to cash out in Vancouver and probably Toronto as well.”
“Whether or not Canada will face a hard landing will be determined by whether or not household risk was correctly priced in the first place. In other words, when Canadians show up to refinance their mortgages, if their interest rates jump and/or the terms of their loans change dramatically, then households could default at a rapid rate,” said Bricklin Dwyer an economist at BNP Paribas in a recent Financial Post article titled “Canadian housing boom to grind to a halt”. “If the demand for housing slows too quickly, then homeowners could quickly find themselves underwater and promoting a dangerous cycle as they try to unload their home.” This does not bode well for Boomers wishing to downsize.
Faced with declining house values and a slowdown in home sales, a lack of qualified or interested buyers to absorb the growing wave of Boomers needing to downsize their homes over the next twenty years, Boomers should consider downsizing ahead of the massive wave to protect their retirement. Not selling and downsizing to a smaller home to be mortgage free in retirement, carries significant risks. “There’s nothing better than being mortgage-free in retirement. Your home is your financial base. Remortgaging it at retirement could put your entire estate plan at risk, according to Farhaneh Haque, director, mortgage advice, for TD Canada Trust, in a recent Financial Post article “Using your home as a retirement fund carries risks”.