Before we dive in, let’s revisit a topic we’ve covered in the past. It’s important to avoid comparing yourself to others since we’re all so different. We come from different backgrounds, have different priorities and have had different opportunities in life. With that in mind, the following statistics aren’t meant to cause anxiety if you’re currently behind a benchmark or to deter you from continuing your path if you’re ahead on others. It’s intended to give a sense of how other people navigate financial decisions, so you know you’re not alone in facing these trade-offs. It’s also designed to provide ideas and reference material that you can add to your thinking.

Saving

One of the core pillars of personal finance is to save some of your money for the future. By spreading out your spending over your lifetime, you provide a more consistent standard of living. A typical target is to save 20% of your income for future goals, splitting that between your retirement, debt repayment and other milestones.

Savings rate

As we look at the historic savings rate in Canada since 1961 (graph below), we can see that the amount people save varies over time. Several factors that impact how much people save include the:

1. Ability to save

   • During and immediately after recessions, it can be challenging to save money for the future. Either due to a job loss or a low income over several years, you may be challenged to continue saving as much.

2. Incentives to save

   • If we compare the following two graphs on the savings rate and interest rates, we’ll see that the amount people save is highly correlated with the reward received (i.e., interest rates).

It’s been challenging over the last two decades for Canadians to save. We’ve experienced two recessions and have seen interest rates come down dramatically (as we’ll discuss shortly). However, the reality remains that if we want to continue a similar lifestyle in retirement, we need to save some of our income today.

Source: Statistics Canada.

Interest rate

As we mentioned above, when interest rates were highest in the 1980s, the savings rate in Canada peaked between 15% and 20%. It makes sense for people to save more when they’re being rewarded for doing so. What’s counter-intuitive, though, is that we need to save MORE when interest rates are low. This is because we can’t rely as much on our investments to do the heavy lifting for us.

For instance, if you saved $1,000 in 1980 and bought a 10-year bond paying 15% interest, you’d have $4,000 in 1990. If you purchased that same bond today in 2020 at an interest rate of 1.5%, you’d receive $1,160 in 2030.

Employment

A stable job that matches your qualifications and strengths and pays a fair wage goes a long way to helping you save. This is most likely to happen when the economy is doing well, and unemployment is low. When unemployment rises, it can be hard for people to find any job, let alone the right job for them. As a result, maintaining a high level of employment is a key consideration for Canada’s central bank.

Unemployment

As the economy improves and companies increase hiring, unemployed people can enter the workforce, and underemployed people can change jobs to a more appropriate position. This gradually helps to increase salaries as companies compete for the right talent. Therefore, low unemployment is an essential input into your bargaining power as an employee and placing upward pressure on wage growth.

Income

The following two tables provide median income figures across different households in Canada. The first table looks at the median market income, which is the take-home from sources such as employment income, private retirement income and income from investments. The age separation at 65 years old refers to the highest income earner’s age.

Source: Statistics Canada.

The above table doesn’t account for taxes and government transfers (e.g., pension payments). Once these are factored in, the following table presents the median after-tax income across the same groups.

Source: Statistics Canada.

While these median values provide some help in understanding how much Canadians have available to spend and save, the numbers vary further across geography, age, education and more.

Investing

Saving for the future is essential, but it’s nearly impossible to save every dollar you’ll spend in retirement yourself. If you work for 40 years and could be retired for 30 years, you’d need to save ~50% of your income to smooth out your spending over this period without investing. Instead, by saving 10% to 20% of your money and investing it appropriately, you can build up a nest egg to provide throughout your retirement.

Inflation rate

One critical reason to invest and earn a return on your savings is inflation. Each year in Canada, prices for the goods and services you purchase increase. Over the last 20 years, this has happened at an average rate of ~2% a year. In earlier periods, prices could increase more than 10% a year, as shown in the 1970s and 1980s (graph below). Unpredictably price increases are bad for an economy. It makes it hard to plan and invest, and there are direct costs to constantly updating prices, to name just a few challenges. Because of this, keeping inflation consistent around 2% is the objective of Canada’s central bank.

In summary, investing can help you earn a return on your savings so that when you no longer have an income and want to spend on more expensive goods and services, you can.

Financial assets

To help grow your savings for future goals, you can invest in stocks, guaranteed investment certificates (GICs), bonds, ETFs, mutual funds and more. To minimize your taxes, you can first deposit your money into a tax-advantaged account such as a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Education Savings Plan (RESP) or more. The following table outlines the use of these account types as well as deposit accounts and employer-sponsored pensions to help Canadians save and invest for the future. The table also includes the median value for each. As with many of the other stats throughout this post, these values vary by geography, household type, age and more.

Source: Statistics Canada.

Borrowing

Borrowing money can be very useful in certain situations. If you’re going to school or purchasing a home, borrowing money can help you benefit from the purchase earlier in your life and for a longer period. That said, the more you borrow, the less you can spend in the future as you pay interest and eventually repay the loan.

Student loans

Many Canadians borrow money to pursue post-secondary schooling. This makes sense in many cases, as education is an investment in yourself. You’re likely to develop relationships, ways of thinking and hard skills that you can take into the job market. This often provides a return on your investment through a higher salary, a better-aligned career and a stronger degree of confidence and self-identity.

While the investment is often worthwhile, it’s still valuable to consider ways to minimize and deal with any debt related to the purchase. Roughly 50% of those who pursue post-secondary schooling have debt coming out of their degree (graph below).

Source: Statistics Canada.

Mortgage debt

As interest rates have come down over the last 40 years (outlined in the second chart of this post), house prices have gradually increased (as we’ll see in the next section on housing). Lower interest rates allow people to take out larger mortgages while making the same monthly payment. For instance, if you can afford to pay $2,000 a month on a mortgage over 25 years, you could get a $310,400 mortgage if your interest rate were 6% or a mortgage for $421,800 with an interest rate of 3%. As a result, it’s natural that we’ve seen mortgage debt increase over the last 20 years.

The following table shows the median mortgage balance for people with a mortgage in each age range. The age ranges represent the highest income earner’s age. Both the 1999 and 2016 numbers are reflected in 2016-dollar terms, meaning the increase isn’t related to inflation.

As of 2016, 38% of Canadians had an outstanding mortgage, with a median balance of $180,000.

Source: Statistics Canada - Table 5.

Household debt to disposable income

The combination of student debt, mortgages and other borrowings (e.g., credit cards) has resulted in a historically high household debt to disposable income ratio in Canada. Because interest rates are historically low, the costs for people to maintain this level of debt is currently manageable. However, if interest rates rise, households with high debt may have difficulty merely paying the interest on their debt, let alone repaying the original loans. As a result, it’s vital to start paying down loans before you feel you must.

Source: Statistics Canada.

Housing

Decisions you make on housing can have a significant impact on your financial health. For most, housing costs represent ~30% of their spending. Also, commitments (e.g., mortgages) can last for decades. If you purchase a property, it should ideally be from an informed position and for the right reasons.

Housing prices

The expectation that property values will continue to increase indefinitely is dangerous. The following graph shows the real residential property price in Canada since the 1970s. These numbers have been adjusted to remove the impacts of inflation and indexed to the year 2010. This means in 1970, when the graph starts, residential prices were ~40% of what they were in 2010. In 2019, prices were 140% of what they were in 2010.

As you can see, there have been several periods in the past where house prices don’t increase (beyond inflation) for decades at a time. The fact that prices have trended upwards over the last 20 years is aligned with the increased mortgage balances we saw above. However, as we’re at historically low interest rates, there’s no guarantee this trend will continue.

Therefore, before purchasing a property, it’s important to consider what you would do if the value decreased. If you plan to live there indefinitely, the price of your house has little impact on you. However, if you’re buying and planning to sell in 3 years, it will help to consider what you’d do if prices were down.

As of 2016, 61.7% of Canadian households owned their home, with a median property value of $349,000.

Rent

For the roughly one-third of Canadians that don’t own their home and instead rent, it’s important to consider the trade-offs between paying rent and buying a property. Paying rent provides flexibility to move as required and limits the risk of unexpected expenses (e.g., new roof, new furnace). If you’re paying less than 5% of the property value in rent (e.g., less than $2,000 a month in rent on a property valued at $480,000 or more), you may be spending less in ‘unrecoverable costs’ than you would if you purchased the property. As a result, even though people often look at renting as ‘throwing away money,’ you may be able to increase your net worth faster by renting than by owning.

With all that said, if you are renting, it may be helpful to know how rental costs compare across the country. It’s also important to remember that not all rents are charged at the current market rate. For instance, in Toronto, although new rental listings are posted at $2,500 a month for a two-bedroom apartment, the average rent currently paid by occupants across the city is ~$1,600 (table below). This can help answer questions like, how can people afford to live in a specific area. Not everyone is paying the same amount. Some cities have rent control, and some properties may have longer-term lease agreements.

This knowledge is important as it comes back to our comment that everyone’s situation is different. If you have the same job as a colleague, earn the same amount, but moved to the city three years after them, you may be paying significantly more in rent. As a result, you can’t expect to save while also spending on other areas in the same way they can.

Source: Statistics Canada.

Retirement

One of the most significant undertakings in personal finance is preparing your savings and lifestyle for a time after employment. Retirement includes much of what we’ve discussed above, including saving money for later, investing it and making sound financial decisions along the way. In addition to all these activities, a key question is when to retire. As we’ll see below, the number of years people spend in retirement is gradually increasing due to an improving life expectancy. This can place additional pressure on your finances and lifestyle decisions.

Retirement age

In most calculators and examples on retirement, the assumed retirement age is 65. In 1927 the age to receive a government pension in Canada was 70. The qualifying age was gradually lowered to 65 between 1965 and 1969. For the last 50 years, the default retirement age has remained 65. However, as we’ll see shortly, the average life expectancy in Canada has increased significantly. This has resulted in a higher number of years spent in retirement, requiring additional savings.

Over the last decade, the federal government has gone back and forth on policies to increase the retirement age for government pensions. In April 2019, the Canadian Institute of Actuaries (CIA) released a statement recommending Canada increase its retirement age from 65 to 67.

As we can see from the graphs below, the median retirement age is on a slight upward trend, with notable differences between employment type.

Source: Statistics Canada.

Life expectancy

The following table provides a glimpse of just how much our life expectancy has improved. To read the table:

1. Find your age in the ‘Current Age’ column.

2. The probability labels at the top provide the chance that you’ll live to the age on the left of each row.

3. If you’re male, you can reference the first column under each probability, and females can reference the second column.

4. The third column marked ‘M/F,’ provides the age that one person out of a male, female couple is expected to live to.

If you’re currently a 30-year-old female, there’s a:

• 50% chance you live to 92 years old;

• 25% chance you live to 97 years old;

• 10% chance you live to 101 years old.

This provides a remarkable opportunity to continue to spend time with loved ones and to experience more of what life has to offer. It’s also important to consider these possibilities when saving for and planning for retirement.

Source: FP Canada - Projection Assumption Guidelines.

Net worth

We can combine everything we’ve discussed in this post into a single table.

• Saving

• Employment

• Investing

• Borrowing

• Housing

• Retirement

As we can see below, people build their net worth over their working years and then rely on it in retirement. They have assets like retirement savings and a home, as well as liabilities like student debt and a mortgage.

To minimize outliers, the following table provides the net worth per household for middle-income households. In this case, middle income refers to the third income quintile. Assets include investments, life insurance, pensions, real estate and more. Liabilities include mortgages, credit cards, vehicle loans, lines of credit, student loans and more.

Source: Statistics Canada.

Closing remarks

I hope this data and summary of how different areas of your finances interact with one another was helpful. If you enjoyed the post, please consider sharing it with others. Again, this isn’t meant to tell you what to do. Instead, it’s here to help inform your decision process. Money is simply a tool to help you live the best life you can. That will look different for each of us.

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