The importance of accumulating wealth

Statistics show us that median family incomes decline in our retirement years to about 80% of our incomes in our mid-50s. But a recent Statistics Canada study tells us that personal consumption makes no such adjustment. In fact, seniors in their 70s consume 95% of what they consumed 20 years earlier. So, if consumption exceeds income, asks StatsCan, how do retirees manage to maintain their standard of living?

In an August Economic Insights entitled "Financial Well-Being in Retirement,î Sébastien LaRochelle-CÙté looks at the role accumulated household wealth plays in allowing retired seniors to enjoy their golden years. "For many seniors, a declining employment income stream does not necessarily signal financial pressures,î he writes, "because they have built up a stock of wealth.î

LaRochelle-CÙté looked at household wealth as the total value of real estate holdings and sources of financial wealth such as savings accumulated in investment funds and retirement savings plans, minus outstanding debts. Conventional replacement income considers only family income, which includes employment income, income from private pension plans, retirement pension income and personal income.

He looked first at financial wealth excluding the net worth associated with the principal residence, and second at all forms of wealth including the principal residence. In the first instance, he writes, "The average value of the annual income of individuals aged 65 to 74 was 8% higher than income values obtained from the more conventional definitions used in replacement rate studies.î

Take the older age group, 75 to 84, and the accumulated financial assets added an average of 20%.

Add in lifetime income from the principal residence, and the measurement advances further. For the 65-74, it was 15% higher; for the 75-84, it was 35% higher. "Thus,î LaRochelle-CÙté concludes, "when financial wealth is taken into account, the ëadjusted' income becomes similar to the average income of individuals aged 45 to 64, whose financial well-being is based largely on employment income. It is, therefore, possible that asset accumulation can play a significant role in maintaining seniors' level of consumption, at least for those in the generation born immediately before the baby boom.î

Therein is the caveat. The baby boomers, who are just entering retirement, are not included in the statistics. The work and savings habit of this generation could affect future results.