A new report from BMO Economics urges Canadians to ramp up their savings from the current three to four per cent range to just under nine per cent, if they hope to meet their longer term financial goals.
“The prospect of a prolonged period of subdued investment returns after the recent rebound suggests that Canadian personal savings trends, on average, are on the light side for adequate retirement purposes,” explains Douglas Porter, chief economist, BMO Capital Markets.
“While the most straightforward way for policymakers to address this over the longer term is to get interest rates back to neutral levels, the higher-interest-rate cavalry is nowhere on the horizon,” adds Porter.
Porter says that, while debt has risen to 165 per cent of disposable income, financial assets have rebounded to 453% of disposable income; this likely rose further in Q4, probably surpassing the record high of 454% in 2007 just before the financial crisis began.
“It’s true that the ratio of net financial assets to income — 285% in Q3 of 2012 — remains below pre-financial-crisis highs, but it has moved back above the 10-year average, suggesting Canadian household finances are fully under repair.”
Households continue to increase their risk in search of higher yields, with equities and high-yield bonds benefitting from the rising demand. This shift has lifted household assets to a record high, but cannot be counted on to continue closing the savings gap.
Porter notes that Canadians will likely need about 18 times their desired retirement income — over and above any payments expected from the Canada Pension Plan and Old Age Security — in order to retire comfortably.
“While every case is unique, a typical and reasonable retirement income goal is often about 60% of pre-retirement earnings,” says Porter. “Given that the CPP and OAS are designed to replace about 25% of pre-retirement income for the average Canadian, that leaves a target of about 35% of pre-retirement income to be funded from individual savings.”
The BMO Economics report comes on the heels of the BMO Household Savings Report, which showed Canadians planning to save aim to put away $9,859 in 2013.