BMO Financial Group

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BMO Financial Group

February 07, 2013 09:45 ET

BMO Suggests Nine Per Cent Household Savings Rate Key to Meeting Long-Term Financial Goals

- 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 income

- 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

TORONTO, ONTARIO--(Marketwire - Feb. 7, 2013) - 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.

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 comfortably.

"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 solutions.

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