9% savings key to meeting financial goals

While a stronger stock market has provided a boost to household wealth, Canadians still need to ramp up their savings in coming years – from the current 3% to 4% range to just under 9% — if they hope to meet their longer term financial goals, according to a new report from BMO Economics.

“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.

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“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.

He notes that while debt has risen to 165% 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,” he says.

Read: Canadians to boost savings in 2013

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 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 — to retire comfortably.

“While every case is unique, a typical and reasonable retirement income goal is often about 60% of pre-retirement earnings,” he says.

Read: Debt drags down retirement savings: Poll

“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,” Porter adds.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.