Abstract
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This paper examines one dimension of the overall state of financial preparedness for retirement in Canada by assessing the adequacy of households’ private saving. The definition of saving adequacy followed in this study is based on the saving optimality implied by a stochastic life-cycle model. A household is said to save adequately if it accumulates more wealth than the optimal saving implied by the model. Model predictions are then compared with the observed saving behaviors in the 2005 Survey of Financial Security. Overall, the findings reveal that the median of observed wealth of the sample households that were 60 to 64 years old is higher than that of the simulated wealth from the model used in the study or 62% of the sample households have accumulated wealth exceeding the simulated median wealth implied by the life-cycle model used in this study. The overall risk of undersaving is small: only households that fall below the bottom 23rd percentile of the wealth distribution are estimated to save less than the simulated targets implied by the model. The saving adequacy and the risk of undersaving also vary with household characteristics. Households with lifetime private-pension coverage and couples fare the best: 70% of the former and 72% of the latter accumulate more wealth than the simulated medians. The risk of undersaving is also small for these groups. Households without private-pension coverage or single households are close to the simulated targets at the median level: about 54% of the former and 45% of the latter accumulate more wealth than the simulated medians. However, the risk of undersaving for these groups is higher: households without private pension coverage who fall below the bottom 40th percentile of the wealth distribution and single households who fall below the 60th percentile are likely to save less than the simulated targets implied by the model.
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