Canadians need to be saving more than twice the amount they are today to retire comfortably, says BMO Capital Markets.
Canadians are now putting away four per cent of their pre-tax income, 2010 data show, considerably below the six per cent rate recorded over the past 20 years, the report finds.
Yet while rising stock markets and real estate have boosted the value of Canadians' financial assets in recent years -- offsetting higher debt levels and lower saving rates -- the outlook for returns has dimmed, given low interest rates and equity valuations that have reached above-average levels, says BMO deputy chief economist Douglas Porter.
"The prospect of a prolonged period of subdued investment returns suggests that Canadian personal savings trends, on average, are now on the light side for adequate retirement purposes," Porter cautioned.
In this environment, a savings rate closer to 10 per cent of pre-tax income is needed to generate retirement income equal to 60 per cent of pre-retirement earnings.
So an individual earning $70,000 a year would need to save $7,000 a year to eventually generate total annual retirement income of $42,000, Porter said.
The Canada Pension Plan and Old Age Security plans are intended to provide 25 per cent of pre-retirement income, or, in the case of the $70,000 wage earner, about $17,000. That leaves $25,000 a year to be generated from savings.
Generally, a nest egg needs to be 20 times expected retirement income.
So in this case, the $70,000 wage earner would require total savings of $500,000 (or 20 times $25,000).
The report, prepared by Porter and BMO Capital Markets economist Robert Kavcic, assumes an inflation rate of two per cent and average returns of five to six per cent from a typical balanced portfolio over the medium term.
It also argues that record high household debt levels are not as daunting as they may appear -- thanks to stock market returns that drove up the value of individuals' financial assets -- and thus won't stand in the way of people reaching their retirement goals.
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