Millennials priced out of ownership must save 50% more than homeowners to retire 

New report by global consultancy finds that home ownership provides millennials a significant advantage to retirement readiness – if they can afford it.

Toronto, Canada, April 12, 2023 – Millennial workers who rent for their entire careers must save 50% more than homeowners in order to have a sufficient monthly income in retirement, according to the 2023 Mercer Retirement Readiness Barometer.

This new analysis finds that, in order to achieve a reasonable income in retirement, a millennial who rents for their entire career would need to save eight times their salary in order to achieve retirement readiness, retiring at age 68. That same millennial, if they own their home, would only need to save 5.25 times their salary – and be able to retire three years earlier, at 65.

Homeowners, in retirement, do not have to pay nearly as much for it. Homeownership also gives retirees flexibility, as retirees who downsize may be able to access a significant amount of money. Renters, conversely, must pay rent every month or face eviction – whether they are 25 years old or 85 years old.

In an environment where the cost of living continues to rise and housing affordability continues to decline, many millennials may become resigned to renting, having been permanently locked out of the market. Compounding these retirement challenges is the issue of debt, as the rising cost of living causes consumer debt to mount – preventing many working people from saving for either a down payment or a retirement.

The employer plan advantage

The above analysis assumes that the millennial worker, with a starting salary of $60,000, enjoys a total contribution of 10% of their salary per month to a savings plan. This is a level of savings that may be difficult to achieve for many younger workers.

But employer matching programs make it more possible: employees participating in these plans have their savings power increased, making robust savings goals more achievable.

Employers looking to bolster their employees’ financial wellness, and to reap the rewards in productivity and talent retention, should look to maximize engagement with employer matching benefits.

Don’t be risk-averse

Millennials may look on their boomer counterparts with envy – this generation tends to be wealthier, enjoying the returns from many decades of appreciation on real estate. But in the present macroeconomic environment, many boomers – nearing retirement – are watching the poor performance of capital markets, compounded by inflation and the rising cost of living, and may be thinking about taking risk off the table.

Mercer’s analysis shows that would be a tremendous mistake.

A boomer turning 65 today would have seen a very poor performance in equity markets in 2022, with a typical balanced portfolio showing an average return of -10% or lower over the year, depending on that portfolio’s specific asset mix. An investor, seeing performance that poor, may be tempted to trade in equity for lower-risk assets like Guaranteed Investment Certificates (GICs). But by taking the potential for asset growth off the table with a properly diversified portfolio, that investor would be significantly more likely to run out of money before the end of their lives – or potentially working additional years to achieve retirement readiness. Moving a portfolio to a guaranteed, interest-based investment for just the first three years following retirement makes it 10% more likely that a retiree will run out of money. This is in comparison to staying invested in a balanced portfolio, subject to market fluctuations.

Workers nearing retirement looking to secure their wealth have options: they may choose to work additional years, and they may choose to delay commencing government benefits like Canada Pension Plan (CPP) or Old Age Security (OAS). This would boost the amount received per month – meaning that the individual in question will have an increased source of revenue, offering more protection against inflation. Delaying commencement of CPP and OAS to age 70, from age 65, decreases the probability that the theoretical retiree will run out of money in their retirement by nearly 15%.

About the Mercer Retirement Readiness Barometer:

The Mercer Retirement Readiness Barometer measures the age in which different personas can comfortably retire based on their participation within an employer-sponsored DC plan and benefits provided by the government (like CPP/QPP/OAS).

The above analysis is based on Mercer retirement readiness analytics using data from proprietary Mercer databases and tools. The millennial model assumes the individual starts saving for retirement at age 25, with a starting salary of $60,000, contributing 10% annually through a workplace savings program and invests in a balanced fund. The boomer model assumes that the individual in question retires at 65 with a salary of $80,000 per annum and has been saving at 10% for 20 years.

Retirement readiness is defined at a 75% probability of not running out of money before death if an appropriate level of income (66% of pre-retirement income for the boomer and 69% for the millennial) is maintained throughout retirement (including government benefits).