Canadians’ average saving rate 5% too low
By National Underwriter
By Warren S. Hersch
Canadians must increase their average savings rate to close to 9 percent from the current 4 percent to meet their long-term financial goals, according to new research.
BMO Financial Group, Toronto, released this finding in The BMO Economics Report. The study follows a BMO Household Savings Report, which shows that Canadians plan to save on average $9,859 in 2013.
"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," says 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.”
Porter adds that, while debt has risen to 165 percent of disposable income, financial assets have rebounded to 453 percent of disposable income; this likely rose further in the fourth quarter, probably surpassing the record high of 454 percent in 2007, just before the financial crisis began.
"It's true that the ratio of net financial assets to income—285 percent 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 (exceeding payments expected from the Canada Pension Plan and Old Age Security) to retire comfortably.
"While every case is unique, a typical and reasonable retirement income goal is often about 60 percent of pre-retirement earnings," says Porter. "Given that the CPP and OAS are designed to replace about 25 percent of pre-retirement income for the average Canadian, that leaves a target of about 35 percent of pre-retirement income to be funded from individual savings."
Originally published on LifeHealthPro.com