Canadians need to save between 10 per cent and 21 per cent of their pretax incomes each year - if they save consistently for 35 years - to have comfortable retirement incomes, according to a new report by former Bank of Canada governor David Dodge.
The report says many Canadians are unaware of the high savings levels they need for their retirement years, and may believe they are saving adequately when they are not.
The report, co-authored by Alexandre Laurin and Colin Busby and published by the C.D. Howe Institute, calculates various savings scenarios based on assumptions that Canadians aim to have annual retirement incomes between 50 per cent and 70 per cent of their preretirement incomes.
"Our findings provide Canadians with a 'reality check' about the saving rates required to meet their retirement goals," Mr. Dodge said in a release Thursday.
Our findings provide Canadians with a 'reality check' about the saving rates required to meet their retirement goals. David Dodge
The study said a broad debate about retirement incomes in recent years has mostly focused on potential reforms to rules for corporate pension plans or the possibility of expanding public pension coverage through a new national supplementary plan.
But there has been little public information about required savings rates for individuals, it says, even though many baby boomers are nearing retirement age and are concerned about whether they are saving adequately.
"The required level of personal saving is unknown to most individuals, leaving them to their own devices for a large part of retirement planning," the report says.
It also says registered retirement savings plan (RRSP) maximum contribution levels do not allow higher income higher earners to save enough to replace 70 per cent of their incomes in retirement.
And it says many companies' group RRSP plans, defined contribution pension plans and even traditional defined benefit pension plans do not set aside enough income annually to provide "adequate or reasonably assured retirement incomes."
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The authors base their savings calculations on what they call "prudent" assumptions, including a nominal rate of return on investments of 5 per cent, an inflation rate of 2 per cent, and a real return on investments of 3 per cent. They assume annual wage growth of 3 per cent.
The calculations look at three scenarios: early retirement at age 63, normal retirement at age 65 and late retirement at age 67. And they assume Canadians begin saving at age 30 and invest consistently each year.
The report also includes another set of calculations based on a scenario in which some people save less in their thirties, more in their forties and the most in their fifties. In those cases, investors must save much more in their later years to compensate for the shorter investing periods.
According to the findings, people who earn between $42,803 a year and $150,000 a year need to save between 11 per cent and 21 per cent of their annual earnings to retire at age 65 if they want to have retirement incomes at 70 per cent of their preretirement earnings.
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More specifically, people earning $61,270 a year and retiring at age 65 must save 14 per cent of their annual income consistently from age 30 to have retirement incomes equal to 70 per cent of their preretirement incomes. They must save 11 per cent annually to have a 60-per-cent income replacement rate.
For people earning over $150,000 a year, the savings rate climbs to 21 per cent of annual income to earn a 70-per-cent replacement rate when retiring at age 65. Such a savings level is not allowed under current RRSP contribution rules.
Indeed, RRSP rules do not permit enough savings to earn 70 per cent of preretirement income for people earning over $61,270 a year if they wish to retire early at age 63, the report says.
The authors say their findings raise questions about whether Canadians are willing to spend less in their working lives to enjoy better retirements, concluding "their actions suggest they are not." But it says this may be because people mistakenly think they are saving enough to meet their goals. Or it may be because they are prepared to accept the trade-off of lower retirement incomes.
It also says some people may be willing to retire later so they can spend more during their working years and reduce their annual savings requirements.
"Different Canadians will legitimately make different choices," the report says. "But to make smart choices, Canadians ... need both adequate information and, most importantly, appropriate vehicles to provide efficient risk-adjusted management of their savings."