Reality Check: What the C.D. Howe Study Means for Retirement Savings
Following a recent blog on the risks of “saving too much,” a new study from the C.D. Howe Institute offers a clear-eyed reality check for retirement savers and pension administrators. The core message is simple: using past investment returns as a guide to future performance is likely to mislead. That caution matters because retirees and those building retirement income rely on return assumptions to set savings targets, allocate assets and price pension liabilities.
What the report projects for long-term returns
The study lays out conservative long-term expectations. For long-term government bonds, the institute projects a nominal return of about 2.5%—which, after assuming 2% annual inflation, translates into roughly 0.5% in real terms. For equities the outlook is more favorable: a nominal return near 6.9%, or a real return of about 4.8% after inflation. A 50/50 balanced portfolio sits between these extremes, with an expected nominal return of 4.7% and a real return of roughly 2.7%.
Those figures are considerably lower than the historic returns many investors and plan sponsors have relied upon. The authors warn that periods of very high past yields—such as the double-digit government bond yields seen decades ago—are not a reliable foundation for projecting future performance, especially given today’s much lower starting interest rates.
Downside risks and hidden costs
Even these conservative baseline forecasts contain upside and downside variability. The report highlights that there is roughly a 25% probability that actual returns could be lower by two percentage points over a 10-year horizon and lower by one percentage point over 30 years. Separate from market variation, investment management fees can further erode outcomes; the authors note that expensive active management could shave about one percentage point off long-run returns for individual savers or defined contribution plan members.
Put together, lower-than-expected returns and fees can create a significant gap between projected and realized retirement income—meaning many savers could experience a more substantial decline in lifestyle than they anticipated unless they adjust their plans.
How much more do savers need to put away?
The study examines common retirement income replacement targets—50%, 70% and 100% of pre-retirement income—and finds that saving requirements rise materially when using more realistic, lower real-return assumptions. In a scenario with a real return of about 2.66%, the saving effort required to reach the same replacement rate can be substantially higher than under more optimistic forecasts.
For example, to generate an annual retirement income of $50,000, the required savings rate can be almost 1.5 times greater under the gloomier return assumptions than under optimistic ones. Concretely, to reach a typical target of 70% income replacement for a $50,000 final salary, the required savings rate over 30 years increases from roughly 9.6% to about 14% of gross salary.
Options to close the gap
Faced with these projections, savers and plan sponsors have limited options: save more, accept a lower retirement standard of living, take on more investment risk, cut fees, or delay retirement. The study highlights delaying retirement as a low-risk way to mitigate investment shortfalls—extending working years increases savings and reduces the number of retirement years to fund. For instance, postponing retirement from age 65 to age 67 reduces the example savings requirement from about 14% to approximately 11.2% of gross salary in the study’s scenario.
Taking on more investment risk may boost expected returns but also increases the potential for larger short-term losses and greater volatility in retirement outcomes. Reducing costs—by limiting high management fees—directly improves net returns and can significantly lower the amount you need to save. Plan sponsors and individual investors should therefore pay attention to fee levels, asset allocation, and realistic return assumptions when planning for retirement.
Practical takeaway
The C.D. Howe study’s “reality check” is a reminder that retirement planning should be grounded in conservative, well-documented assumptions and that reliance on past performance can produce complacency. Savers should revisit their assumptions regularly, stress-test their plans against lower-return scenarios, and consider practical responses: increasing contributions, trimming fees, adjusting asset allocation prudently, or delaying retirement. Pension administrators should avoid using historical returns as a short-cut for long-term projections and instead incorporate more realistic expectations and contingency planning into their funding and liability models.
In short, the study does not predict disaster; rather, it urges a sober assessment of likely returns so that individuals and institutions can make informed choices and avoid unpleasant surprises in retirement.