BMO Suggests Nine Per Cent Household Savings Rate Key to Meeting Long-Term
- Douglas Porter, BMO Chief Economist, forecasts that savings rates
may need to reach 9 per cent to strengthen household finances over
the long term
- Report shows the brighter side of the debt picture, with household
financial assets reaching near-record 453 per cent of disposable
- Report comes on the heels of the BMO Household Savings Report,
which showed Canadians planning to save aim to put away $9,859 in
TORONTO, ONTARIO -- (Marketwire) -- 02/07/13 -- While a stronger
stock market has provided a boost to household wealth, a new report
from BMO Economics states that Canadians still need to ramp up their
savings in coming years - 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," said 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," added
Mr. Porter added that, while debt has risen to 165 per cent of
disposable income, financial assets have rebounded to 453 per cent of
disposable income; this likely rose further in Q4, probably
surpassing the record high of 454 per cent in 2007 just before the
financial crisis began.
"It's true that the ratio of net financial assets to income - 285 per
cent 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.
Mr. Porter noted 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
"While every case is unique, a typical and reasonable retirement
income goal is often about 60 per cent of pre-retirement earnings,"
stated Mr. Porter. "Given that the CPP and OAS are designed to
replace about 25 per cent of pre-retirement income for the average
Canadian, that leaves a target of about 35 per cent 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.
"It's encouraging to see Canadians are planning to maintain or
increase their personal savings this year, particularly as we look to
balance increasing debt loads and turn around decreasing rates of
savings," said Ernie Johannson, Senior Vice President, Personal
Banking, BMO Bank of Montreal. "While it's important to pay down debt
- particularly high-interest debt - it's essential that households
build themselves a financial cushion as well, whether it be for
retirement or other key life events."
About BMO Financial Group
Established in 1817 as Bank of Montreal, BMO Financial Group is a
highly diversified North American financial services organization.
With total assets of $525 billion as at October 31, 2012, and more
than 46,000 employees, BMO Financial Group provides a broad range of
retail banking, wealth management and investment banking products and
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