Personal savings is something most people realize they should prioritize. However, we often struggle with knowing how much we need to save. If you are under the impression that you don’t need to save for the future, read You Shouldn’t Rely on Government Benefits before reading further.
“Do not save what is left after spending, but spend what is left after saving.”Warren Buffet
Pockets of the Canadian economy have seen some extreme volatility over the last year. Although many individuals continue to be bullish on the economy, there are many signals that say to tread carefully.
Consumers continue to take on more debt pushing household debt figures higher than ever. With that, the average Canadian could be putting the future and their retirement at risk.
With higher debt comes higher payments. This has caused the Average Canadian to decrease their savings rate drastically. The historical average savings rate in Canada from 1961 to present is 7.61%.
Below is a picture showing the average rate per year from 1961 to present. The dotted line represent the average rate throughout that time.
If we couple the historic rate of 7.61% with the fact that the average Canadian makes around $50,000/year, that would be savings of $3,805. The historical rate of 7.61% is still well below the recommended rate of 10%.
Unfortunately, however, Canadian households aren’t even coming close to attaining the historical rate in 2019.
Average Canadian Savings
According to TradingEconomics.com the current savings rate for Canadians is 1.7% of household income in the second quarter of 2019. Assuming the same income of $50,000, that is only $850 saved every year.
Let’s assume that you start saving at 25. You put that $850 away every year. Assuming 6% returns, 2% inflation, and 40 years of contribution, that would leave you with just over $137,000 to fund your retirement.
Although that sounds like a considerable sum, for most that is not enough to retire on. The rule of thumb when withdrawing funds for retirement is a 4% withdrawal rate. That would give you about $5,480. Even if you withdraw the full 6% of gains every year (assuming the market never goes down), you will only have an annual income of $8,220.
Even in addition to CPP and OAS, $8,220 would not be sufficient for most people to retire on.
Why Do Canadians Suck at Saving
There are many reasons why Canadians suck at saving. Spending beyond our means, high cost of living to list a few, but the one we want to focus on is lack of communication. This lack of communication starts when we are kids.
Ideally our financial education should start when we are children. We should be taught how to save properly and how to spend properly (stay tuned for a future blog post about how to spend your money). However, that is not the case for most of us.
Money seems to be a taboo subject in most households. Typically minimal information is shared and everyone is left to figure it out for themselves.
A lot of our financial habits are generated by watching what our parents have done. For millennial’s, this may include observing our parents as home owners, RV or cabin owners, and and annual vacationers. Often times we do not observe the savings, budgeting or ‘behind the scenes’ activities that successful people are participating in.
This creates a false view of what healthy financial situations look like. After observing, we take those unhealthy habits into our adult years and into our own marriages. It may take years to figure out what a healthy financial situation actually looks like. By that point it might be too late.
Communication in Marriage
Finances are extremely important in the context of marriage. 82% of engaged or newly married couples surveyed feel closer to their significant other when they are in agreement about money. Yet, only 37% talk about their finances on a monthly basis.
It is important that no matter how uncomfortable it may be, Canadians begin talking openly about finances. There is no shame in saying ‘no’ because you’re budgeting, or being on a different page as your spouse. These things are healthy because they open up the door for good communication.
Communication is key. Start talking.
For more information about why talking about money is important read, The Importance of Talking Money.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy