According to a new report from HEC Montréal, higher income earners, on average, are those least prepared for retirement – a trend that remains unchanged since the study’s 2020 report was published.

Entitled Canadians Preparation for Retirement (CPR): An update report, the retirement and savings institute’s research report attempts to make sense of conflicting reports about Canadian’s retirement readiness, using the institute’s own calculator and modelling.

The simulation captures a very wide range of inputs, including data on initial account balances, planned contributions and expected withdrawals across all account types, and looks at the type of assets held in each. It also incorporates survey data from 6,005 households.

“On average, Canadians have net income in retirement which is higher than their pre-retirement income – if they retire at the age they intend to, maintain their savings and debt payment strategies and convert all their financial wealth into income upon retirement,” they write. Despite this finding, however, they add that 16 per cent of Canadians remain unprepared for retirement.

Private savings 

“Private pillar savings are critical for retirement preparedness,” they add. “Low income individuals (those with earnings below median) are well covered by the public system even if they have no savings or registered pension plan coverage, while the group that is least prepared is that of higher income households with no registered pension plan coverage or savings. In this group, only 52.4 per cent of households are on track to be ready for retirement. Only 69.9 per cent of those with no employer pension but with private savings are prepared for retirement.” 

They continue, saying defined benefit pension (DB) plans in particular play an important role in determining retirement readiness. “Those without DB pensions and without savings have much lower retirement readiness scores,” they state. “If DB pensions were to disappear and not be replaced by other savings, the share of prepared households would drop to 72 per cent,” a 14 percentage point drop.

The report also examines inflation. Assuming three per cent inflation, they say slightly less than 20 per cent of Canadian households would not be prepared. “Further, 21.9 per cent of households would have less than an 80 per cent chance of being prepared for retirement, an increase of 4.3 percentage points from the baseline scenario,” they write. “Overall, most Canadian households seem somewhat resilient to a modest uptick of inflation from two per cent to three per cent per year. This is likely because benefit levels available in first and second pillar pensions (OAS/GIC and the CPP/QPP) adjust to changes in costs of living. This emphasizes the important role of these two pillars for many Canadian households.”