Saving and the generational divide

Recent studies by Manulife and TD Bank show contrasting attitudes toward financial planning among baby boomers, gen x-ers and millennials

Saving and the generational divide
Canada has a problem with saving. Last year, the nation reached an unwarranted milestone as personal debt exceeded GDP for the first time. Spurred by ultra-low interest rates, too many people are now living beyond their means and aren’t adequately preparing for the future. Canada is currently in the midst of a demographic shift that will decide the country’s economic future. Baby boomers, gen x-ers and millennials represent a diverse mix, but one thing unites them all – none are saving enough.

A recent study on debt commissioned by Manulife confirmed as much, and indicated that a generational divide has emerged when it comes to people’s attitudes toward money. Rick Lunny, CEO of Manulife Bank of Canada, says that while the findings of the study weren’t exactly shocking, they did concern him.

“The most surprising element that came out of this was the attitude of millennials – one-third of millennial homeowners thought that mortgage interest rates were too high,” he says. “Interest rates have been so low for so long that you have a generation of homeowners who have never seen interest rates go higher. A significant proportion of them are not prepared for what inevitably will be rising interest rates.”

The Bank of Canada has resisted such a move so far, but the Fed finally raised its key rate in December. After years of quantitative easing, it now appears we are slowly entering a new interest rate environment. And if the Manulife survey is any indication, it will be a painful transition for many people.

The data revealed that among Canadian homeowners, almost three in 10 spend more than 30% of their net income on mortgage payments. This means one out of every six respondents would experience financial diffi­culty if there were any increase to their mort­gage payments.

“Traditionally a mortgage should be about 30% of income; once you get past that level it becomes challenging,” Lunny says. “Also, you have to be prepared for unforeseen expenses. About half of the people in this survey have less than $1,000 in rainy day savings. If you have to get your car repaired or need a new furnace, often there is nowhere to go but relying on high-interest credit card debt.”

Aside from Canadians’ somewhat blasé attitude toward keeping an emergency fund, the fact that so many are comfortable living on credit is another red flag. In this case, a preference for plastic appears to be a proclivity for younger Canadians. Among millennial respondents to the study, 31% felt it was “not a big deal” to carry a balance on their credit cards. By comparison, only 24% of gen x respondents and 21% of baby boomers felt the same way.

“The older the generation, the longer the memory on higher interest rates, so they tend to be conservative,” Lunny says. “If you look at credit cards, the older you get, the less comfortable you are carrying credit card debt. They have the experience of seeing mortgage interest rates as high as 22% in the past.”

Problems with debt and savings aren’t the preserve of those born after 1980, however. In his position as CEO of Manulife Bank, Lunny sees plenty of examples of people nearing retirement with a nest egg that is nowhere near large enough. He believes the property market has sheltered many people from the realization that they aren’t setting enough aside to sustain themselves in old age.

“With baby boomers, 80% of their net wealth is in their house,” he says. “That could mean they live in Toronto or Vancouver and won the housing lottery, but it could also mean that Canadians generally haven’t done a great job saving. Many people do not have enough savings and are relying on the equity in their house to finance their retirement.”

When it comes to the children of the ’60s and ’70s, this problem is even more pronounced. Only around one in three gen x respondents expressed confidence in their ability to maintain their lifestyle in retirement, compared to 41% for millennials and 45% for boomers. Not being able to save for retirement was the top source of stress for gen x respondents (41%). Rather than losing sleep over debt or savings, Lunny recommends seeing a professional, no matter your age.

“Canadians who are feeling overwhelmed by their debt could really benefit from professional advice – someone sitting down with them and looking at their expenses and seeing where they can save or reduce their debt,” he says.

Multi-generational living Manulife isn’t the only institution crunching the numbers to try to identify why Canadians are saving less and taking out more debt. A TD Wealth survey released in January revealed that many parents are taking a hit on their retirement savings in order to help their children financially. This often involves the adult offspring moving back into the family home, or what is known as the ‘déjà-boom’ effect.

The report found that 62% of Baby boomers believe the déjà-boom effect is preventing them from saving enough for retirement, and 58% feel financially stressed. Most glaring was the revelation that one in four Canadian baby boomers supports their adult children or grandchildren. Tim Raposo, a senior financial planner at TD Wealth, concedes that while this situation is far from ideal, it can have benefits for both sides.

“When we sit down and look at their circumstances, we can put an action plan in place to address any shortfalls,” he says. “In some cases it works out even better for boomers living with their millennial children.

There is cost-effectiveness there for both sides of the equation if the children are in a position to offer some financial support.” As housing prices and the general cost of living spiral ever upward, and wage growth remains pretty static, the concept of parents and children living in the same home until much later in life is a growing phenomenon. In fact, in many cases, a large part of the family tree can be found under the same roof.

“It could be a temporary thing – maybe they’ve just finished school and are working part-time,” Raposo says. “As a younger person establishes themselves in the workforce, having that crutch helps. It’s not as common for people in their 30s to do this, but in some cases we even see people who are married and have children moving back with their parents. So there are three generations in the household.”

While these sorts of arrangements can be beneficial in the short term, the long-term impact of the déjà-boom effect is much less positive. If a person in their late 20s or 30s can’t afford to pay a mortgage or rent, chances are they aren’t saving for retirement either.

Wealth management and millennials Sophia Bera, founder of Gen Y Planning, believes millennials are no more negligent when it comes to saving than the older clients she used to serve. Having worked in the wealth management business since 2007, Bera started her firm in 2013 to help young people manage student loans, reduce debt and increase savings while directing their investment, insurance or tax planning needs.

“It’s about how you balance all your financial priorities,” Bera says. “[Millennials] want to make sure they are saving for the future and retirement, but how do you do that when you are also paying off student loans or saving for a down payment on a home? Often there is a life event that will motivate them – getting engaged, getting married, having a baby or a new job.”

Another difference Bera has noticed is that millennials generally want to be more involved when it comes to wealth manage­ment. The internet makes research much easier than in the past, so younger clients aren’t a blank canvas when it comes to financial planning.

“I have noticed that millennials want to be educated about their money, whereas previous generations tended to be more hands-off,” she says. “They would trust their advisor and take whatever advice they were given. I think millennials want to know what choices they should be making and why. Financial educa­tion is a huge component of what I do.”

At the Toronto-based New School of Finance, many of the clients who walk into Shannon Lee Simmons’ office also are on the younger side. Winner of the award for digital innovation at the 2016 Wealth Professional Awards, Simmons operates a fee-only practice that provides cash management, portfolio assessment, tax and retirement planning to professionals, families, retirees and entrepreneurs.

The services a client requires are often linked to their age, Simmons explains. “We have clients from all demographics, but we get a lot of millennials, usually between the ages of 25 and 35,” she says. “If they are just looking to pay back debt and get some financial literacy, it can be as young as 25. When you get more into deep financial planning and retirement, it tends to be 35 to 40.”

Are Canadians putting off saving for retirement for too long, though? People live longer now, so those extra years require a larger pension. It takes time to accumulate such funds, however, and often 25 years simply isn’t enough time.

“They are thinking about retirement, but there are a lot of other financial priorities when you are younger,” Simmons says. ”It’s hard to prioritize retirement when you are 29 with student debt and are still saving for a deposit on a house.”

The client base at the New School of Finance ranges from students to those entering their golden years; in advising them, Simmons has noticed an obvious factor that separates boomers and millennials with regard to their assets.

“In urban centres, housing is the big divide between the generations,” she says. “That plays into a retirement plan as well. If you plan on renting forever, then it means you don’t have an asset where equity is building, so you have to do double duty on your retirement portfolio.”

Another issue is the changing work environment younger Canadians must contend with now. The ‘one job for life’ dynamic of their parents’ and grandparents’ era is almost extinct. Instead, they’re pursuing part-time and contract positions that offer flexibility, but the trade-off is a lot less security and limited benefits. This changes the conversation a financial advisor must have with a client.

“Student debt and precarious work are two issues that change the way I give financial advice,” Simmons says. “Emergency accounts have to be bigger, and you have to account for longer periods of time between contracts potentially. The whole steady pension, group RRSPs, employee-matching programs – I’m seeing fewer and fewer of those.”