Study: Income adequacy in retirement

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The financial well-being of retirement-age households headed by seniors would increase markedly if their "potential income" from assets such as housing and mutual funds were included in their total income.

Research into the adequacy of pensions has focused on the income and consumption streams of households following retirement. However, these do not incorporate the potential income that could be realized from owned assets, which can be used in retirement to supplement reported income.

The study, "Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada," takes this potential income into account when comparing the pre- and post-retirement financial situation of Canadian households.

Findings show that including this potential income increased the level of financial well-being of retirement-age households relative to working-age households.

About half of the increase came from the benefits of housing as saving on rent and as realization of part of the wealth in the home through a reverse mortgage.

For example, the mean before-tax income per adult-equivalent in households headed by people aged 65 to 74 was 77% of that in households headed by individuals aged 45 to 64.

However, when non-housing wealth and housing wealth were included, this percentage increased to 88%.

Calculations using after-tax rather than before-tax income yielded an even greater improvement in the relative position of retirement-age households when potential income from assets was considered.

The mean after-tax income per adult-equivalent in households headed by seniors aged 65 to 74 was 79% that of households headed by individuals aged 45 to 64. When non-housing and housing wealth were considered, this percentage rose to 105%.

Note: This research paper examines the "potential" income of households that could be generated if they liquidated their assets and purchased an annuity. The resulting income was added to the actual income streams of retirement-age households headed by a senior aged 65 or older. The result was compared with the income of households headed by younger adults to determine if the addition of "potential" income changed the picture of the relative financial situations of households. Data came from the 1999 Survey of Financial Security, the most recent survey that provides a large enough sample to accurately calculate the statistics used herein.

Income per adult-equivalent is measured as income divided by the square root of the number of people in the household to account for economies of scale and changes in household size over time.

The research paper "Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada" is now available as part of the Economic Analysis (EA) Research Paper Series (11F0027M2011074, free) from the Key resource module of our website under Publications.

Similar studies from the Economic Analysis Division are available online (www.statcan.gc.ca/economicanalysis).

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588), Economic Analysis Division.