Canadians not saving enough to retire:

Report By Ottawa Business Journal Staff
Thu, Jun 14, 2007 12:00 PM EST

Younger baby boomers are not saving enough money to cover even their basic household expenses in retirement, according to a study released Thursday.

A study by the University of Waterloo's Department of Statistics and Actuarial Science found that only one in three Canadians expecting to retire around 2030 are saving enough to meet basic household expenses in retirement. They are left with the option of retiring in poverty or working past the age of 65 unless they significantly increase their retirement savings.

The study, titled "Planning For Retirement: Are Canadians Saving Enough?", was carried out in April and focused on baby boomers born in the early to mid-1960s. two different income levels were examined: households earning the Average Industrial Wage ($40,000 in 2005) and those earning twice that amount. The study was sponsored by the Canadian Institute of Actuaries. "The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement," said institute president Normand Gendron.

"Governments need to provide Canadians with more education about the role that different savings vehicles can play in generating retirement income, and provide tools and incentives that encourage more households to save."

The study found that diversity is the key to saving enough. The one-third of households that is saving enough is doing so through a combination of home equity, company-sponsored pension plans, registered retirement savings plans and personal savings, the study found. These sources of income would supplement the modest monthly cheques from Old Age Security and the Canada/Quebec pension plans. Households that depend on only one type of savings vehicle for retirement consistently fall short of what they will need.

The study found that home equity is an important element for many Canadians, so much so that it suggests the government should make interest paid on a residential mortgage tax deductible. "We found that home equity can make a significant contribution to narrowing the gap, provided your home is paid for when you retire," said Steve Bonnar, one of three actuaries who directed the University of Waterloo project team. "Yet while home equity is important, on its own it is not enough to close the gap."

The study suggests many Canadians fail to appreciate how much money they will need to retire comfortably, since its results contradict a poll the institute also commissioned in April. The poll, conducted by Pollara Inc., found that "55 per cent of Canadians aged 40 or older feel some level of confidence that they will have the financial resources to retire comfortably."

Mohican's blunt evaluation is that it is very true that the average Canadian DOES NOT save enough to even meet basic expenses in retirement and I don't know where they expect the money to come from - the magic money fountain in the sky I guess.

As far as making mortgage interest tax deductible, that idea is bunk! bunk! bunk! If the government wants to encourage saving for retirement they should make it more lucrative for companies to have pension plans, encourage group retirement savings plans, and give bigger deductions for RRSP contributions. Encouraging people to buy a bigger house through mortgage interest deductability is not a good way to encourage savings.

Personal Budgeting

As a financial planner I meet many different types of people, single, married, with children or without, seniors, and anyone else you can think of. Everyone has a different personal budget it seems whether its a conscious choice about how much they spend money in different categories or a 'fly by the seat of the pants' approach which is also a budget of sorts - its just really short term budgeting!

As a general rule, when I find people are in financial trouble, it is likely I will find overspending in some categories and a general lack of savings to help smooth out life's bumps and irregularities. This can be a habitual problem with many people - they spend too much and don't save enough. Many times I recommend that these people start a more rigorous budgeting procedure and a more disciplined approach to spending and consumption.

I was curious as to the average Canadian's budget so I dug up some StatsCan data and put it into a chart. The numbers are for 2005 - click to enlarge.


Generally speaking, Canadians don't save enough and they pay a lot in taxes.

And for interest sake here is my personal family budget.


I know the categories aren't the same but it is interesting to compare. I would roughly fall into the "Couple with Children" category. I spend significantly less on taxes, food, and transportation than average. I also invest and donate far more than average and I pay more on my mortgage than average. This is likely because 1) I live in the most expensive real estate market in the country and 2) I have a very short amortization period. Other differences are that I don't gamble or smoke and I don't have any education expenses.

Gong Show: Income Taxes

Okay, today I'm bringing the Canadian Income Tax system to the gong show for you to decide if it gets the gong. Here are the reasons why I think the Income Tax system should get the gong:

1) It is more complicated than necessary
2) It penalizes people for being innovative, for being more productive and for working harder.

I'm not talking about abolishing income taxes here but my biggest gripe is with the fact that our income tax system penalizes people who are trying to improve their family's well being and the general well being of our country. Let us use an example:

Imagine Bill. He owns his own company and he works hard to find new ways to serve his customers through better products and services. Lets pretend that Bill, because he works hard, makes a personal income of $100,000 per year. In BC, under our tax system, ignoring personal deductions, he pays $28,187 in income taxes, leaving him with $71,813 to feed, house, and cloth his family. This seems alright since Bill is a proud Canadian and doesn't mind paying some tax to help run his country and his average tax rate seems reasonable at 28.1%.

Bill is considering implementing a new service in his company and he would earn an extra $100,000 per year if he implemented this new service. His customers would be very well served and this would be a tremendous innovation for his industry. The drawback is that Bill would have to invest a little, risk losing his idea, work longer hours and be away from his family in order to implement this innovation. Bill does some figuring and looks at what he should do since his family could really use the money to pay for braces, education, a family vehicle and a family vacation. Bill figures that if he implemented his new service and worked the extra hours he would earn $100,000 extra per year, bringing his gross income up to $200,000. He also figures that he would go from paying a reasonable $28,187 in income taxes to paying an excessive $71,339 in income taxes and he would go from a net income of $71,813 to a net income of $128,661 - an increase of only $56,848 for all that investment, risk and effort - leaving him with an average tax rate of 35.7%.

Unfortunately, for his customers, Bill decides that the investment, risk, and extra work is not worth $56,848 per year and makes the choice to postpone the implementation of this service until it makes more sense.

This situation is actually all too common in Canada because successful and innovative people like Bill make economic choices everyday based on the net benefit to them, their company, and their family. Our tax system unfairly taxes the people who would likely create new jobs, invest in equipment and provide innovative new services given the right incentives. I'll talk more about our tax system again soon.

Find out your own personal tax rates here.

What do you think? Gong?