Is There Hope for Generation X With No Retirement Savings?

Are you a Gen Xer, or do you have clients who are? Did you know that 28% of this demographic (ages 37 to 52) has not saved anything for their retirement? This, according to a recent survey by DAC Sponsor Franklin Templeton*. The following case study explores Helga and Michael’s story and highlights the important role of seeking the right tax and financial advice, sooner rather than later. 

But first to why this generation has these pain points to begin with. Root causes include insufficient income, high expenses and consumer and high mortgage debt leaving little or nothing available for savings.  

However, public pensions and some recent improvements to them can help.  The Gen Xers will likely have Old Age Security and Canada Pension Plan retirement benefits. One bright spot for this group is that recent changes to the Canada Pension Plan will result in a larger pension (up to one-third higher than current pension rates). Still, for a reasonable standard of living in retirement, some additional source of income will be required.

Gen Xers who are lucky enough to have a registered pension plan from their employer may have sufficient additional income, but what about those who don’t have a workplace pension? In order to accumulate sufficient savings to supplement government pensions, significant discipline will be required to pay off consumer debt and then divert as much savings as possible into retirement savings. Consider Helga and Michael’s story:

Helga and Michael are both in their mid-40s. They both work and, together they earn $125,000 annually. However, with two children in university, Michael’s mother living with them, and a $4,000 a month mortgage payment, they have been unable to put anything aside for their retirement.

However, in five years, their children will have graduated freeing up $40,000 annually. And in ten years, the mortgage will be paid off freeing up another $48,000 annually. So, if both these amounts are diverted into retirement savings, will that be enough? Assuming a $40,000 annual contribution for 15 years (indexed at 2% and earning 5% return) plus a $48,000 annual contribution for 10 years (again indexed at 2% earning 5% return), at age 65, the couple will have retirement savings of approximately $1.7 million. Over a 20-year retirement, this is sufficient to provide a combined pension of starting at approximately $110,000 annually.

Although this may sound like a really good pension, consider that by the time they retire, inflation will have made that pension equivalent to about $61,000 in current dollars. This amount should be adequate when added to the couple’s OAS and CPP. But recall this was only possible by saving $40,000 a year for five years and $84,000 a year for the last 10 ten years prior to retirement.

For those not willing to make such a commitment, the only alternative may be to save less but continue to work and defer OAS and CPP to age 70.

Freelance work and the rise of the gig-economy may be another option for Canadians approaching retirement age who need to work later in life, but desire greater flexibility. However, that comes with its own complex considerations when it comes to retirement income strategies. For example, self-employed individuals have to contribute both the employer and employee portions of CPP contributions. An advisor can add great value to the services they offer to their self-employed clients by addressing retirement planning early and providing strategic plans to help their self-employed clients meet their retirement goals.

Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) Survey *

Additional educational resources : Help Gen X plan for the future as an MFA™-Retirement and Succession Services Specialist .

If you work with self-employed clients, newly entering the gig-economy later in life, or seasoned entrepreneurs, encourage them to come to the Business Builder Retreat in Puerto Vallarta, Mexico on November 9 & 10. It’s another important resource for them as it focuses on providing the special skills they require to meet the responsible challenges of business life, while striving for individual balance and good health.

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