While there’s a common perception that Canadians face a retirement crisis, a McKinsey report says a strong majority of households are actually on track to maintain their standard of living in retirement.
The report, Building on Canada’s Strong Retirement Readiness, says 83% of the nation’s households are on track to maintain their standard of living in retirement.
“These are enviable numbers, but they still leave 17% of households at risk of having to lower their standard of living when they stop working,” says the report.
Read: No retirement crisis
The research reveals that most of the unprepared households belong to one of two groups of middle- to high-income households: those that do not contribute enough to their DC plans or group RRSPs and those that do not have access to an employer plan and have below-average personal savings.
Ninety-three percent of modest-income households are on track to maintain their standard of living in retirement, primarily because they will receive a high rate of income replacement from public sources.
Mid- to high-income households show a mix of readiness levels.
Almost 91% of those with a DB pension are on track while 75% of those with access to a DC plan or group RRSP are on track. The 25% of households not on track generally do not participate in their plans or have low contribution rates. Overall, 31% of households with access to DC plans or group RRSPs do not contribute to them, and another 11% contribute 5% or less.
Read: What retirement crisis?
Sixty-three percent of mid- to high-income households with no employer pension plan are on track. However, the report says there are two distinct sub- groups: “savers,” households with an above-average savings rate, are far more prepared (95%) than “non-savers,” those with a below-average savings rate (46%).
“The minority of Canadian households that are not on track for retirement are impacted primarily by three decisive forces: lack of access to employer plans, low contribution rates to these plans, and low personal saving rates among those without access to an employer plan,” says the report.
The two groups of households most at risk for a financially strapped retirement are mid- to high-income households that have access to a DC plan or group RRSP but do not contribute enough, and mid- to high-income households that do not have access to an employer plan and have below-average personal savings.
One assumption that would have a significant impact on overall retirement readiness is the use of non-financial assets as a source of retirement income. If 30% of home equity were converted into retirement income, the percentage of Canadian households on track for retirement would increase to as high as 87%.
The report analyzed the situation of about 9,000 working households and about 3,000 retired households.