Relying on performance? We likely need to adjust our retirement expectations.

Coin going into a building

The last 25 years were pretty good to a lot of people. Specifically, those who invested in real estate and those who remained committed to a long-term equity investment strategy. The luckiest among us did both. But, will this luck continue?

Frederick Vettese is an actuary and partner at Morneau Shepell. He is the co-author of The Real Retirement and author of Retirement Income for Life. It’s his job to think about what’s next using big data and realistic assumptions about the future in Canada. He sees two fundamental shifts that will force Canadians to reassess their retirement plans. 

Shift #1. Home equity as retirement income   

A lot of homeowners in Canada saw their personal net worth skyrocket as the result of home equity. In the Greater Toronto Area, for example, prices rose by 500 per cent between 1980 and 2010. Homes were suddenly worth way more than they cost, including all principal and interest payments. For today’s retirees, there are lots of ways to access that equity and turn it into retirement income. But Vettese points to three reasons why this phenomenon is unlikely to repeat itself for recent buyers. 

  1. Growth is unsustainable because home prices rose much faster than increases in income. Real estate has simply become unaffordable for many people. 
  2. The number of people who own their home is at an all-time high. This means fewer buyers (demand) to push prices up. 
  3. Canada’s price-to-rent rate is higher than in virtually any other developed country, meaning it may be in one’s best long-term interest to avoid home ownership and accumulate other kinds of wealth instead.

All this means that Canadians cannot expect to rely as much on home equity as a source of retirement income. 

Shift #2. Realistic rates of return

Just as falling mortgage rates propelled housing prices upward, falling interest rates enhanced the returns on both stocks and bonds. Unfortunately, rates can’t go much lower and will likely rise slowly which isn’t good for bond returns and not especially positive for stocks either. Investors are far more likely to witness an average annual return on retirement savings of just 5 to 6 per cent. And keep in mind that 5-6 percent is the expected return on the assets exposed to market risk. Fixed income investments, such as Guaranteed Investment Certificates (GICs), will deliver much less. 

So what’s next?

Home equity will still be a reasonably good way for many Canadians to grow their net worth and well-balanced portfolios will continue to grow, just not to the extent we’ve experienced in recent decades. But this is not necessarily a bad thing for those who want to keep working and contributing. Vettese anticipates that unemployment in Canada could bottom out in the next ten years when it reaches just 4 or 5 per cent. “When this occurs,” he writes, “employers and governments will make an effort to keep people working and keep the economy functioning. Sexagenarians will represent the only group large enough to fill [the employment gap].”   

Understanding the changes that are taking place in the economy is the best way to start building a realistic retirement plan. Your Lawyers Financial Advisor can help you determine your retirement help you prepare for the realities of the coming decades. Book an appointment with your Advisor and request your free copy of The Real Retirement and Frederick’s latest book, Retirement Income for Life – Getting More Without Saving More by Frederick Vettese. 


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