The Piggy Bank Index: Gauging Whether Your Retirement Dreams Match Your Savings

By: Hélène Gagné

Do you know what percentage of your annual earnings must be saved to enjoy a comfortable lifestyle in retirement?

That required level of personal saving is entirely unknown to most Canadians, according to a recent study from the C.D. Howe Institute, co-authored by former Governor of the Bank of Canada David A. Dodge.

The March 2010 study’s “Piggy Bank Index” highlights the fact that making smart savings and investment choices today is critical to ensuring you have access to a sufficient and secure post-retirement income.

Dodge and his co-authors estimate that most Canadians, if they want to retire at age 65 and replace 70% of their working incomes (a common level used as a rule of thumb), must save from 10% to 21% (for high income earners) of their pre-tax earnings every year for 35 years.

Unfortunately, notes the study, even though private retirement savings plans can allow some to choose their own retirement age and income, the current tax law in Canada prevents many earners from accumulating enough RRSP savings to securely replace 70% or more of their working incomes. In my view, this fact alone should raise immediate alarm bells for legislators.

The study also concludes that, predictably, most people are not ready to reduce their consumption to save enough for retirement. Of course, those who have not been saving for 35 years and are starting late in the game, will have an even more difficult time adjusting. Even shifting your retirement age two years, from 65 to 67, will not make a substantial difference in the savings rate required. Sobering messages, but important to hear as soon as possible in your earning years.