Do Gen X and Gen Y have a false sense of financial security?

(Image courtesy of adamr / FreeDigitalPhotos.net)

Two-thirds of Canadians belonging to Generation X and Y are confident in their ability to purchase a home, send their kids to university and live a comfortable retirement, a new BMO study has found. Is their optimism misguided? The bank’s sobering report suggests it might be given today’s challenging landscape wrought with “spiralling real estate markets, delaying parenthood and a lack of retirement savings.” All this may be true, but this Millennial isn’t utterly despondent for her tribe. I’ll explain why later, but first let’s hear from the survey respondents and BMO.

Home ownership

Overall, 68% of Gen X (born between 1965 and 1979) and Gen Y (born between 1980 and 2000) respondents said they feel confident they will be able to purchase a home at some point in their lives. This despite the fact the average home in Canada now costs roughly $400,000 or nearly eight times the average pre-tax annual income of a salaried worker in this country (compared to five times in 1997), as BMO’s 12-page Wealth Generation: The Financial Challenges for Generations X & Y report points out.

Cost of kids’ education

Seven in 10 Gen X and Y Canadians who plan to have children expressed confidence in being able to pay for their kids’ post-secondary education. That may prove problematic since Canadians are choosing to have children later in life, increasing the number of “parensioners” (retirees/pensioners with limited income and with children who are still young enough to attend a post-secondary institution), the bank said. Couple that with rising tuition fees (university costs are expected to hit as high as $140,000 for a child born in 2013) and the picture appears even less rosy.

Retirement reality

In addition to buying a home and footing the bill for college, the majority of young adults in Canada also feel they’ll be able to save enough for retirement. According to BMO, the biggest problem with this assertion is that many Canadians in this camp haven’t starting saving for retirement yet (14% of Gen Y and 10% of Gen X). Meanwhile, traditional workplace pensions are disappearing and life expectancies are on the rise.

“While it’s encouraging that the majority of Gen X and Y are feeling upbeat about achieving key financial goals, the reality is that there are some obstacles that they need to acknowledge and address,” BMO’s Chris Buttigieg said in a press release.

“These generations face challenges that are unique, but there is light at the end of the tunnel,” he said. “If they want to set themselves up for success, it’s crucial that they develop a financial plan as early as possible, which identifies key life goals and their associated costs, and then start on a saving and investing program, including opening and contributing regularly to various investment vehicles such as TFSAs, RRSPs and RESPs.”

My take

First off, I’d like to thank BMO for its cautionary perspective on the financial future of younger working Canadians. It’s a comprehensive report that raises legitimate concerns unique to my generation. But like Buttigieg, I too see a light at the end of the tunnel.

Will my generation need to spend more than previous generations on a home? Probably. But let’s not forget mortgage rates are much lower than they used to be when our parents were young, freeing up our money for an array of investment options our parents never had.

Will education cost a small fortune? Perhaps. Luckily, new parents today have access to RESPs, complete with tax benefits and free government tops-ups. And I’d wager that despite the rising costs, more of our kids will be enrolled in highly-specialized programs leading to high-paying jobs than ever before.

Will my generation need to take responsibility for funding our own retirement? Definitely. Thankfully, we have access to TFSAs and RRSPs. Together, these can result in a seven-figure portfolio with modest, bi-weekly contributions invested soundly over just a few decades.

Will any of this be easy? Definitely not. It will require discipline. The BMO report does, however, suggest we already have a healthy dose of that. Asked if they have a monthly spending plan or budget, 77% of Generation Y responded affirmatively and 79% of Generation X agreed, but only 72% of the Baby Boomers did so. Similarly, all three cohorts agreed financial planning, comparison shopping and emergency funds are important pieces of the personal finance puzzle.

My generation is no stranger to a fiercely competitive, expensive world in which barriers to entry (whether it be academia, the workforce or real estate market) are high and everything worth having requires a little luck and lot of hard work. The fact we’re still optimistic is a good sign we’ve got what it takes.