Not living paycheque to paycheque is hardly financial independence

Not living paycheque to paycheque is hardly financial independence

The percentage of Canadians living paycheque to paycheque has declined but it’s a far cry from widespread financial independence.


The Canadian Payroll Association today released its annual national employee survey citing a five percentage point decline (47% to 42%) in the number of Canadians who would be in “financial difficulty” if their pay were delayed even a week. The stats are slightly worse in Ontario, although the trend is also in the right direction: instead of more than half of Ontarians (52%) living pay cheque to paycheque, the percentage has fallen to less than half, or 48%.

There is of course a huge gulf between barely being able to make the next month’s rent or mortgage payment, and the seemingly universal goal of early retirement. Clearly, half of Canadians haven’t even got out of the starting gate when it comes to establishing a modicum of financial independence. According to the CPA, 40% of employees in Canada are spending all of or more than their net pay, with Ontario mirroring that rate.

Never mind retirement or what I call “findependence.” The scary aspect illuminated by the CPA is that apparently half the country’s workers don’t even have that staple of financial planning called the emergency cushion: typically financial advisers recommend having an emergency cushion of at least six months worth of expenses.

Set up emergency savings in a TFSA

So if your household is accustomed to living on $50,000 a year, you’d want as much as $25,000 socked away in liquid assets like a daily interest savings account, cashable GICs, treasury bills or money market mutual funds. At a minimum, in the event of sudden job loss, you’d want to be able to meet six months worth of rent or mortgage payments/property taxes, not to mention whatever amount you normally spend on groceries, transportation and utilities.

Fortunately, the Tax Free Savings Account (TFSA) is a perfect vehicle for this and the accumulated TFSA contribution room since the program’s launch in 2009 is now $25,500: rising to $31,000 this coming January. RRSPs are a poor second since any withdrawals will be taxed and subject to ultimate repayment.

Obviously, Canadians continue to spend too much and save too little. The CPA says 45% of us are saving only 5% or less of our paycheques, which is half of the standing recommendation by financial planners to put away at least 10% of net (after-tax) pay into retirement savings.

Huge retirement savings gap

The CPA also highlights a huge gap between the amount of money people say they will need to retire on and how much they’re actually saving. Over the past year, it reports, the necessary retirement nest egg figure has risen markedly: only 30% think $500,000 to $1 million of capital will do the trick, versus 34% who thought so in 2012. The percentage who believe they’ll need between $1 million and $2 million has risen to 35% from 28% a year ago.

Even so, few are even close to reaching those levels: 73% have put aside less than a quarter of whatever amount they think they need in theory to retire on. Even more disturbing, among 50-year-olds still working, 47% believe they’re still less than a quarter of the way there.

Just keep working

If you’re in that category, you may as well tattoo this on your forehead: Just Keep Working. Indeed, the CPA says that of those who had a particular retirement date in mind, 35% expect they’ll have to remain in the workforce longer than they’d hoped—on average five years longer, compared to what they had hoped back in 2008 (the year of the financial crisis).

This is the fifth year for the survey. The CPA recommends that workers do what most financial pundits recommend: set up an automatic savings account so that a percentage of net pay goes automatically into a savings account, group RRSP or other vehicle. I still do this myself and view this as the single most important action for establishing financial independence—assuming you wish to retire while you’re still young enough to enjoy it.