The retirement of the mass of Canadian baby boomers has long been a part of the Canadian retirement conversation. What happens when this cosseted, entitled class settles down into old age is about to become an issue for many advisors.
Canadian government labour stats are finally picking up the leading edge of the coming wave of baby boomer retirements. A demographic that has long powered the Canadian consumer economy is rapidly slowing and aging into dotage.
Some stats: by 2016, the number of seniors will have grown by nearly 20%, rising from 6.7 million seniors in 2010 to 8.0 million in 2016. Seniors will account for 23% of the total population, and will represent Canada's fastest growing population segment. According to Statistics Canada, between 2015 and 2021, the senior population is expected to outnumber that of children under the age of 15.
But as the Canadian population ages there are real and growing concerns about the ability of large segments of the senior population to fund their retirement. In just the last week two surveys find what many fear--not enough boomers have saved enough.
A Nielsen investor survey commissioned by a Canadian mutual fund company recently polled 1001 Canadians over 35 who had at least $25,000 in investible assets. According to the numbers, 69% of Canadians are concerned that they have not saved enough for retirement. When asked if they were on track to meet retirement goals only one in ten indicated they were confident they will reach their retirement goals.
Another new study, this one released by Scotiabank in the third week of June, found 44% of boomers express concern about outliving their retirement savings. According to the survey 31% had done "some" planning, another 15% had done very little planning or none at all.
That is, there is a significant chunk of Canadians who could be facing a tough time in retirement. Governments seem concerned. Newly elected Ontario premier, Kathleen Wynne, has suggested creating a new Ontario pension plan to help those in need. But for those who retire long before any government help arrives, the crisis around shortfalls in retirement income is already here. The list of options for those facing a shortfall are less than satisfactory:
-Sell the family home and rent
-Spend less during retirement out of fear
-Deplete investment assets faster than desired due to lack of income
-Take lump sums periodically out of retirement savings that create undesired tax outcomes
There is another option, however, the reverse mortgage. Taking money out of the equity of a home to provide monthly income is one way advisors can help clients achieve the goal of financial security while staying in their home. As Jeff Spencer, a vice president with HomEquity Bank, says, "real estate needs to be an active asset class in every retirement plan."
"For many Canadians a big chunk of their net worth is tied up in their homes as they reach their desire retirement time. This is, of course not ideal, but if staying in the family home is their priority they have a great option and that is a reverse mortgage. Unlike with investment portfolios you can't just sell off portions of our homes at a time. The HomEquity Income Advantage product is a great way to create monthly cash flow from that asset and still maintain ownership and control ," says Spencer.
As people age there is an increasing propensity to stay in their home. The reverse mortgage is one way to do this. "The investment portfolios that are there don't have to be depleted as quickly and you are really just essentially selling off pieces of your real estate portfolio. Some will think of this as accumulating debt in retirement. By definition that is correct, but really, the only real debt is the interest. You are using these funds as income so using the principal is no different than liquidating your investment portfolio. For many you may be able to offset the interest expense with tax deferral, or by being paying a lower tax rate. Many will be able to create more return with an extended time horizon on the portfolio. Assets can be invested longer,” says Spencer.
By slowing withdrawals from retirement funds and utilizing the tax-efficient nature of the funds from a principal residence, real wealth can accrue to an estate over time. The reverse mortgage just might make the difference between a fraught, anxious retirement and a comfortable one. What price can be put on that?
In a press release announcing the Scotiabank survey a physician, Dr. Samir Sinha, director of geriatrics at Mount Sinai and the University Health Network Hospitals, is quoted about the relationship between health and financial well-being. "Canadians who have insufficient funds in their retirement years can not only constrain their lifestyle choices, but also significantly impact their overall health and well-being," said Sinha. "Successful aging should no longer be solely centered around our health but ensuring that we will have the financial resources to not only live longer, but also live well."
If a reverse mortgage can bring that kind of peace of mind, it seems an advisor would be remiss to not consider the option.