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Book Excerpt

Will your retirement be a wealthy one? Add to ...

The following is an excerpt from the MoneySense Guide to Retiring Wealthy.

Feeling poorer these days? Join the club. Although the economy has improved markedly since the meltdown of 2008-09, unemployment in Canada was still around 8% in mid-2010, after hovering around 6% in the years leading up to the financial crisis. Even those of us who remain employed saw a huge chunk of our RRSPs vanish into the jaws of the bear market. Bankruptcies are soaring and debt levels remain at heights that would have seemed unthinkable only a generation ago.

No matter what the economic conditions, it's human nature to assume you're falling behind. Many of us lie awake at night worrying about our finances and feeling the stab of envy. Are our friends making more than we are? How did our neighbours with the new BMW manage to sidestep the falling stock market that hammered us-or did they?

If you've been torturing yourself with such questions, the All-Canadian Wealth Test can shed some welcome light on your personal finances.

MoneySense launched the Wealth Test in 2000, and this version is our most comprehensive yet. It lets you see how you stack up against other Canadians on all the key dimensions of household prosperity.

Our research will tell you if you're earning more or less than your peers, if you're wealthier or poorer than others, and if your track record in the stock market is better or worse than that of most investors.

It wasn't a lost decade

Let's start with the good news-and, yes, there is good news. The average household is better off today than it was when Canada was zooming along at the peak of the dot-com boom. We're not trying to brush off the recent downturn, which robbed the typical Canadian of about a tenth of his or her accumulated wealth. But the average household was still 7% richer in real terms in 2009 than it was in bubbly 2000. That's an amazing-and encouraging-fact. Despite the worst economic crisis since the Great Depression, prosperity still appears to be inching ahead.

Problem is, our prosperity comes with warning stickers. One is that our increase in average wealth has been accompanied by an increase in inequality. While the rich are definitely growing richer, it's not clear that middle- or working-class Canadians are any wealthier than they were a decade ago.

Just as worrisome is how we're getting richer. Despite a roaring bull market from 2003 through 2006 and a buoyant 2009, Canadians experienced little joy from the stock market in the last decade. More and more, we have come to depend upon real estate to drive our wealth upward. Thanks to record-low interest rates and innovations such as 35-year mortgages, eager home buyers have propelled housing prices to double their levels of a decade ago. Real estate now makes up an unprecedented share of our personal balance sheets. If the housing market stays strong, we remain prosperous. If home prices crack, look out below.

Two types of wealth

Before we examine these issues in more detail, we should explain that there are at least two ways to measure how well you're doing, financially speaking. One is to look at how much you earn in any given year-your income. The other is to look at how much you would have left over if you sold all your assets and paid all your debts. This is your net worth, or wealth.

You should examine both income and net worth to get a full picture of your financial situation. A recently graduated 30-year-old surgeon may have a high income, but not much net worth-yet. On the other hand, a retired farmer may have only a modest pension income, but an enormous net worth, because of the millions of dollars that his acres of prime farmland would fetch if he chose to sell them to a property developer or the corporate farmer next door.

The paycheque pyramid

The easiest way to start assessing your financial situation is by looking at your income. To give you the most accurate notion of how your paycheque stacks up, we've divided Canadians into two groups-those who are single and those who are part of families of two or more people. You would expect families to have higher household incomes than single-person households, and they do. The average unattached person has an income of $37,800. The average family has a household income of $91,500, or 2.4 times more than the unattached individual.

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