Gen-Z needs to rent to reach their $2.1 million wealth goal

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Sarah, 27, lives in Toronto and experiences first-hand the cost of growing old in her job as a healthcare research assistant. This is one of the reasons why she has high savings goals throughout her life.

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“My opinion is that you can afford a PSW (personal support worker) or a home care aide. All of these things are additional costs borne by the individual, not the system,” she says. “Now I know that the type of health care I receive depends on the type of financing I have as I age.”

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Despite her steady paycheck, retirement savings, and monthly savings strategies, Sarah still finds it difficult to look beyond the next decade, let alone the later years. She wants to own a home by 35 but knows that won’t be a possibility given her current financial situation, but adds that she is willing to move out of the city to get what she wants. Now Sarah can save more for her dream of owning a home because her partner can pay the rent.

“I don’t think I could ever afford one in the city. “That’s just out of the question,” says Sarah.

And she doesn’t just live in one of the most expensive cities in the country. She is also looking for ways to achieve a good quality of life in her later years, and Sarah doesn’t think Canada is the right place for that.

“Living in Toronto, one of the most expensive cities to live in, and with the housing crisis, you’re less likely to be able to afford a house,” she explains. “I’m thinking more about whether it’s even possible to live in Canada,” and says she plans to retire somewhere outside the country, like Spain or Thailand.

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Wealth goals: Sarah wants to reach $700,000 by age 55 and save $700,000 every 10 years thereafter. Extrapolated, that would be $1.4 million at age 65, $2.1 million at age 75, and $2.8 million at age 85.

The numbers crunch

Sarah has $12,000 in investable assets and $1,000 in monthly savings. We calculated what would happen if she invested these assets and continued to deposit the same amount every month and reinvest her profits.

We’ve used three simple return assumptions to broadly illustrate how saving and investing can lead to long-term growth through the power of annual compounding.

Scenario 1: 3% return

Assuming a three percent annual rate of return, as is common on some high-yield savings accounts or long-term Treasury bonds, Sarah would have $123,369 at age 35 and $878,161 at age 65. If she had continued saving until age 85, she would have $1.9 million.

Scenario 2: 6.5% return

Assuming an annual return of 6.5 percent, which is equivalent to a portfolio containing both low-risk bonds and stocks, Sarah would have $144,344 at age 35 and $2.0 million at age 65. Dollar. If she continued saving until age 85, she would have $7.6 million.

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Scenario 3: 10% return

Assuming a 10 percent annual return based on longer-term historical returns of U.S. stocks, Sarah would have $169,135 at age 35 and $5.0 million at age 65. If she continued saving until age 85, she would have $34.5 million.

Consultant’s point of view

We have John De Goey, a portfolio manager at Designed Securities Ltd. (DSL), asked for a comment.

Since the house fund was a shorter-term goal, De Goey suggested that a balanced approach to portfolio construction would be best for Sarah.

However, he warned that her current salary would force her to compromise.

“It’s not realistic under any circumstances to hope to buy a house in Toronto by age 35 and save so much for retirement on top of that salary,” he said. “Perhaps it would be better for her if she committed to being a renter for her entire life so she can convert those savings into a longer-term perspective.”

If she lives frugally and her salary increases over time so she can save more, getting to $700,000 at 55 would be feasible and a $2 million portfolio at 65 is possible.

Retiring in Thailand with “delayed home ownership” could be possible if she gets her finances right.

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Sarah’s reaction

Sarah had a mixed reaction after checking the numbers.

“I’m surprised at how much and how little I’ve been able to save at 65,” she said.

“It sounds like I could either buy a house or focus on retirement, but not both.” She adds: “It doesn’t surprise me that I can’t afford a house in Toronto. Unfortunately, most of my generation recognized this. It’s a sad truth that makes me think about possibly changing my career or finding alternative sources of income.”

If you are a younger Canadian interested in building wealth, write to us at [email protected].

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