The observation is quite brutal thanks to the young workers who have just graduated. Even if they are lucky enough to start their professional lives in a job market full of possibilities, the real estate market could play tricks on them…until they die.
It is often said that buying a property is a form of forced savings. It’s true. No choice to put the mortgage before the shopping trip to New York. And one day, we find ourselves with a property of great value, fully paid for. What liberation! You can also rent all your life, mind you, and put money aside in the hope of a golden retirement.
The problem is that the two scenarios are not equivalent. Even when the homeowner’s and tenant’s savings rate is exactly the same, let’s say 10% for the purposes of the exercise.
According to the firm Mercer, a specialist in human resources and pension plans, a young person who is now 25 years old and who rents all his working life should save 50% more money than someone who becomes an owner in order to have a sufficient income in retirement. And the tenant will have to reach three more years to say bye bye, boss.
Specifically, the owner will need to save 5.25 times their final salary to retire at age 65 with sufficient income. The tenant, for his part, will only be able to reach this financial level if he saves 7.9 times his salary, which will not happen before age 68.
Sufficient income is about 70% of pre-retirement income, with a 75% chance of not running out of funds before death. Government benefits are included in the calculation.
As “the devil is in the details”, here are the assumptions used by Mercer: our two young workers start saving for their retirement at age 25, with a starting salary of $60,000, indexed by 1% net of inflation. Whoever lives in housing pays $2,000 per month. The other buys a house for $500,000 (average mortgage rate of 4%). The calculation takes into account maintenance costs and taxes. Once retired, the house is paid for and is part of the assets that can be sold to support the needs.
This is obviously a fictional scenario and every situation is different. A house can quickly become a money pit due to essential major works, like a rent can become hell because of the neighbors or the mood of the landlord. We can always find exceptions, but this comparison has the merit of demonstrating the importance of saving when you are a tenant. Because the moment when housing will cost almost nothing will ever happen.
Most young people and, I guess, their parents will be put off by these numbers. First, because access to property is a major challenge. Even though they have been falling for months, house prices are still significantly higher than they were before the pandemic and mortgage rates have not been this high since 2008. The idea of having to save 10% of one’s income , on top of all other financial obligations, may also seem out of reach.
It would be much easier to aim for half, or 5%, wouldn’t it? The good news is that the gap can often be made up by your employer’s pension plan. In Canada, the median contribution of companies is “5 or 6%”, specifies Jean-Philippe Côté, investment adviser at Mercer.
But TFSA or group RRSP-type plans, which are increasingly common, are not mandatory. “With our clients, we see an employee contribution rate of 60 to 70%. »
At least a third of workers therefore leave money on the table. It’s too bad. Because a contribution of one dollar that turns into two dollars is an instantaneous (and unbeatable) return of 100%!
To “combat the inertia” of employees, a new trend is emerging. “When hiring, we see more and more pension plans putting the employee by default at 5%,” reports Jean-Philippe Côté. An employee who absolutely does not want to contribute can then request it. Some plans, including those with defined contributions, also offer the possibility of contributing more. In some cases, the employer also increases its contribution, sometimes the advantage lies rather in the low management costs.
Last year, the median management fee for DC and group savings plans was 0.6% compared to 1.9% in the retail market, again according to Mercer. This difference is significant after decades of savings. The person who has always paid 1.9% will have to retire four years later than the person who paid 0.6% to enjoy the same amount.
Retirement is a very distant dream in the minds of young people entering the labor market, and rarely a priority. This is quite understandable. But they need support so as not to hit a wall in their sixties. As companies move away from defined benefit plans that allowed employees to have a comfortable retirement without worrying about anything, they must redefine their role. The worst idea would be to absolve oneself of all responsibility.