I would like to express many thanks to reader George for pointing out an excellent research article by Malcolm Hamilton. The report, titled The Financial Circumstances of Elderly Canadians and the Implications for the Design of Canada’s Retirement System, delves into data from StatsCan’s Survey of Household spending and compares income and spending patterns of working-age and retired Canadians.
The report finds that while prime age Canadians do have a larger income, most of their income goes toward taxes, mortgage, savings and providing for young children. In retirement, most of these expenses are greatly reduced and the amount available for consumption (which reflects the standard of living) is not much less than for prime age Canadians. For instance, senior couples, on average, earn slightly more than half that of prime age couples, but the amount available for consumption is only 14% less. In fact, the surprising finding of the report is that seniors are saving and gifting a full 16% of their gross incomes. It is hard to argue that consumption of seniors is reduced out of necessity when they save a significant portion of their incomes at a late stage in life.
The report concludes:
Much of Canada’s retirement system, both public and private, has been built on a faulty assumption — that seniors need to replace 70 per cent of their employment income to maintain their standard of living. Most of the evidence suggests that the required ratio is 30 per cent to 70 per cent depending on an individual’s circumstances, with the average closer to 50 per cent than 70 per cent. The fact that today’s seniors have roughly half of the income of prime age families, but can afford a similar standard of living, supports this conclusion.
The news is also encouraging for those who want to retire early:
Those who save heavily, either because they participate in expensive pension plans (as are common in the public sector) or because they adhere to a strict savings regime, will typically find that they can retire in their 50s and live comfortably on 50 per cent of their employment income. If they keep working until they achieve the conventional 70 per cent target, they may have trouble spending their retirement income, particularly as they push into their late 70s. The recent experience of public sector plans suggests that many Canadians are prepared to retire in their 50s with pensions that are at the low end of the range that has traditionally been considered adequate.
Related: The Truth About Early Retirement from Reader’s Digest.