Friday, May 18, 2012

Canada's Perfect Retirement Storm

Canada's Bank of Montreal recently released the results of another one of their fascinating surveys; this time, they asked Canadians whether or not they expected to be carrying a mortgage as they "rode west" into their sunset retirement years.  Here are the results.

Across Canada, an average of 51 percent of Canadians expect to be carrying a mortgage into their retirement years.  Regionally, these numbers vary greatly as shown here:

Canada Average: 51%
British Columbia: 59%
Alberta: 46%
Manitoba/Saskatchewan: 48%
Ontario: 47%
Quebec: 58%
Atlantic Canada: 43%

I am not overly surprised by these numbers, particularly for British Columbia where housing prices on the Lower Mainland are stratospheric and mortgages are practically lifelong indentured servitude.  Ontario's results are a bit off if one were to consider only the 416 area code, however, many parts of Ontario outside of the GTA remain relatively affordable.  While Atlantic Canadians have the lowest overall household incomes in Canada, they also benefit from some of the lowest-priced real estate in Canada, leaving them the least worried about carrying mortgage debt into retirement.

On top of the issue of too much mortgage for too long, 52 percent of Canadian homeowners feel that their debt load or mortgage is hindering their ability to save for retirement.  

Let's look at some reasons why Canadians are concerned about having debt in their sunset years.  As shown on this graph, Canada's household debt levels (in red) are higher than the Eurozone, the United States and the United Kingdom:

Here is a graph showing what has happened to the ratio of debt to personal disposable income in Canada since 1980:

Notice that mortgage debt alone is approaching 100 percent of personal disposable income up from a low of just above 40 percent less than 20 years ago.

Here is another interesting graph showing the mean debt of Canadians in 2010 by age group in thousands of dollars and by type of debt:

Canadians between the ages of 56 and 65, prime retirement years, still have a substantial debt load consisting of mortgage debt, secured lines of credit and other consumer credit. 

This graph shows the distribution of household debt by age group as a share of the total household sector debt:

Note how the blue line lies above the red line?  As a consequence of the aging population, the proportion of total household debt held by older households has risen over the decade from 1999 (in red) when compared to 2010 (in blue).

In this graph, we see how overall household indebtedness has increased for the same age group (31 to 35 years of age) between 1999 and 2010:

In 1999, a typical household aged 31 to 35 years of age had total mean debt of $75,000; by 2010, a typical household aged 31 to 35 years of age had a total mean debt of $120,000, an increase of 37.5 percent.

This final graph shows the mean mortgage debt held by Canadians based on income and age group for 2010:

Mortgage debt rises for households with increased levels of household income as would be expected, however, I was rather surprised to see that the 50 to 64 and 65 plus age groups (green and yellow lines) still had mortgage debt even when their household income was in excess of $125,000 annually, twice the average Canadian household income.

Canadians concern about their personal debt levels during the last decades of their lives is, well, concerning.  If, as many analysts predict, housing prices drop or interest rates rise, older Canadian households will find it even more difficult to retire on a fixed income if, in fact, they have a pension at all.  The baby boomer generation may be facing the perfect personal financial storm for the following reasons:

1.) Higher than historically normal household debt levels.
2.) A rising interest rate environment.
3.) A housing market that is declining as more of their peers sell into a saturated market to capitalize on their built-up home equity to fund their sunset years.
4.) A lack of pension income outside of OAS and CPP, underfunded pensions or defined contribution pensions that have lost value.

Yes, things really are different this time, particularly if you compare the retirement prospects of baby boomers to the generation that preceded it.  The 51 percent of Canadians that will still be heavily indebted in their retirement years will find their new reality far different retirement reality from that of their parents.


  1. great analysis. this shows the momentum of another factor that will cause my age group (40) to turn into the working poor to support the poor vision of our politicians and baby boombers.

  2. Many Canadians approaching retirement age will need to re-consider at what age they can afford to retire. Semi-retirement or phased-in retirement need to be options available to boomers. More will be working past 65; 70 will be the new "65".