The All-Canadian Wealth Test

Feeling poorer these days? Join the club. Nearly 400,000 Canadians have lost their jobs since last October. Even those of us who remain employed have seen a quarter or more of our RRSPs vanish into the jaws of the bear market. Bankruptcies are soaring and debt levels have jumped to heights that would have seemed unthinkable only a generation ago.

In a downturn of this size, it’s natural to assume that you’re falling behind. Many of us lie awake at night worrying about our finances and feeling the stab of envy. Is our net worth crumbling to shameful levels? Are our friends making more than we are? How did our neighbors 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 much needed light on your personal finances. MoneySense launched the Wealth Test in 2000 and this year’s version is our  most comprehensive yet. Its goal is to let you see how you measure up versus other Canadians. Our research can 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 most investors.

The good news — and, yes, there is good news — is that the average household is better off today than it was nine years ago when Canada was zooming along at the peak of the dotcom boom. Over the past year, the typical person has lost about a tenth of his or her wealth. But the average Canadian household is still 7% richer in real terms in grim 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 catch 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. In recent years, Canadians have experienced little joy from the stock market. More and more, we have come to depend upon the real estate market 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. But 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 farm land 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 so 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.

The table below lets you see where you fit on the income ladder. We’ve split people into five equal subgroups based upon their incomes. These subgroups are known as quintiles. Each quintile holds one fifth, or 20%, of the larger group. We put the lowest earners into the first quintile, then the next lowest earners into the second quintile, and so on. You can think of these quintiles as five equally spaced steps up the income ladder.

Looking at the dollar value of each step gives you a sense of what typical paycheques look like at various levels of society. To squeeze into the middle quintile for unattached earners — in other words, to make it nearly halfway up the income ladder, ahead of 40% of your peers — a single person requires an annual income of at least $20,901. To achieve the same status for a family, a husband and wife need combined incomes of at least $59,901.

These relatively low numbers may surprise you, especially if you live in Toronto or Calgary, but they are reality for most of the country. While it’s common to read about about million-dollar executives or multimillion-dollar hockey players, the typical Canadian earns less than a postman. You don’t have to be a CEO, a highly paid athlete, or even a doctor to break into the top tier of income earners. A single bookkeeper who makes $52,000 a year ranks among the top 20% of unattached earners. Two married school teachers who together earn $120,000 a year qualify as a top-quintile family.

Rich man, poor woman If you’re not used to thinking of bookkeepers and teachers as members of Canada’s financial elite, it may be a matter of where you hail from. There are vast differences between provinces. We’ve outlined these differences in the singles scene and the household hierarchy charts below. The tables show the average (not the minimum) earnings for each quintile of society. As you can see, Alberta and Ontario are the highest-earning provinces, while Newfoundland and PEI are the lowest. The average top-quintile family in Alberta earns a joint income of $233,800; the average top-quintile family in PEI makes only $136,300.

Your earning power depends not just on your place of residence, but on your sex. Women make, on average, about two-thirds of what men do. While earnings vary widely by age, women as a group earn an average of $31,600 a year, while men earn an average of $47,200. The disparity begins before earners turn 20 and grows until pre-retirement and then narrows a bit after the age of 65. The narrower gap for the younger age groups suggests that women are now placing a higher priority on careers than did previous generations.

There is no sign that the disparities among regions and between sexes are going to end anytime soon. If anything, Canada’s income distribution is becoming even more skewed. The top 20% of all households collect nearly half of all the income generated in Canada. The poorest 20% of households get only 4%. Inequality between the rich and poor has been slowly growing for the past two decades and stands at record levels.

While the rich are gaining ground and the poor are losing ground, the middle is only inching ahead. The average Canadian family saw its after-inflaton earnings tick up a total of only 20% since 1990, or about a percentage point a year. While people who entered the work force in the 1950s through 1970s saw their incomes run up rapidly, the generation that came of age since 1990 has had to settle for slow, grudging gains.

Your bottom line

While incomes are far from equal, wealth is even more unbalanced. The richest 20% of Canadian households control about 69% of the wealth in Canada. The next quintile down possesses a further 20% of our national net worth.

Not much is left over for other people. The bottom 60% of households control only 11% of Canada’s wealth. In fact, the bottom fifth of the population possess no wealth and actually owe a few thousand dollars more than they own.

In are your rich yet?, below, we show you how your wealth compares to other Canadians. The net worth figures in the table include the current value of everything you own — your home, your car, your bank account, your RRSPs, your stocks and bonds, your small business, and, yes, even your company pension. You should total up all these assets, then deduct your debts and other liabilities to arrive at your net worth.

It  doesn’t take a huge sum to be considered middle class. If you’re an unattached individual, you’re richer than 40% of your peers if you have $16,501 in net worth, or about the cost of a very modest new car. A family qualifies for the middle quintile with $167,001 in net worth, which is about half the price of a typical Canadian house.

The average net worth of a Canadian household now stands at $385,000, down almost 10% from the level we hit in the fall of 2007, when the average net worth of a Canadian household hit a peak of $428,000 (in today’s dollars). As we mentioned earlier, though, we’re still doing all right if you take a longer viewpoint. Back in 2000, the average Canadian household was worth only $360,000 (again, in today’s dollars). An optimist might find it remarkable that even after our stock market losses of the past couple of years, our average net worth is still 7% higher than at the peak of the dotcom boom. A pessimist might say that this is a very small advance over a decade.

Up until now we’ve discussed wealth in terms of averages. In many ways, though, it’s more instructive to look at medians. What’s the difference between these two measures? The average net worth is the sum of all the personal wealth in the group, divided by the total number of households in the group. This figure can be distorted by a handful of extremely wealthy households. (If Bill Gates and you and I sit down for lunch, we’re all billionaires on average — but chances are that neither you nor I have anything close to a billion dollars.) In contrast, the median net worth is the wealth of a household that sits right in the middle of the wealth spectrum, with half of all households having more wealth and half having less wealth. (If Bill Gates and you and I sit down for lunch, the median net worth is going to be either your net worth or mine — whichever one of us happens to fall in the middle.)

Average household net worth is pulled up by the 20% of households who control 69% of all the household wealth in Canada. Median net worth is a lot less. In fact, in early 2009, the wealth of the median household was only $170,000 compared to the average of $385,000. The huge gap between median and average is a measure of how much the average figure is pulled up by a tiny number of very wealthy households.

The chart, a slow climb, below, lets you measure your own net worth by age, either in terms of averages or in terms of medians. As you can see, wealth tends to grow slowly over the course of our lifetimes. You typically hit the peak level of your wealth when you are 55 to 64 years of age. By that point, the average household has accumulated a net worth of about $670,000. But don’t forget that this figure is lifted upward by a small number of wealthy households. The median household of the same age is worth only about $420,000.  In general, the median figure is the more representative of a typical household and we suggest you use medians for most comparisons.

Who gets wealthy?

If you’re looking for a formula to become wealthy, let us help. We’ve broken down the key factors for you.

First, it helps to be born male. Households in which a man is the primary earner have net worths that are $36,000 above the overall median for all households of all typesof $170,000.

Next, it’s important to be patient. Wealth grows gradually over the course of your life. A household headed by someone under 35 typically has a net worth that is $145,000 below the median. A household headed by someone 55 to 64 usually has wealth that is $250,000 above the median.

Just like your mother told you, it pays to get an education. A household headed by someone with a university degree or certificate typically has net worth that is $90,000 greater than the median. A hard-working spouse can be another huge advantage. Households with two or more earners have wealth that is $98,000 above the median.

To see where you should be in life (at least, according to the stats), use our wealth calculators. It allows you to compare yourself to similar Canadians. You input your age, your marital status, your education level and other criteria. The calculator shows you the median net worth accumulated by other people with the same characteristics as yourself. If you’re ahead of the median, you can pat yourself on the back. If you’re behind, you may want to think about the reasons why.

No matter how you score on the Wealth Calculator, keep the results in perspective. Our calculator doesn’t account for factors such as bad health or divorce that can devastate your net worth. Neither does the calculator reflect location. If you’re living in a small town, or in an area with lower incomes, your net worth is not going to be as high as someone who has benefitted from the higher salaries and more exuberant real estate markets of a big city.

Our calculator also ignores the question of how you got your money. Canada is still a land of opportunity, but in an age where middle-class incomes aren’t budging by much, inherited wealth can play a big role in determining where you wind up. According to Statistics Canada, 36% of families in the wealthiest quintile of the population have received an inheritance; the average amount of that inheritance was $136,000. In contrast, only 10% of families in the bottom quintile inherited money and the average amount of that inheritance was only $13,200. No matter how hard you work, it is also good to be born into, marry into, or know people with money.

Warning signs

Despite the recession, most of us can take some satisfaction in how our net worth has grown over the past decade. But we should be aware of three warning signs that may indicate trouble ahead.

Warning Sign No. 1 is our addiction to debt. Back in 1990, the typical Canadian owed 91% of his or her disposable income. By 2000, our ratio of personal debt to disposable income had grown to 111%. It has now soared past 140% and is still climbing. We appear to have compensated for our stagnant paycheques over the past couple of decades by borrowing to make up for the raises we missed.

High debt levels are an excellent predictor of bankruptcies, so the galloping increases in our personal debt makes it likely that we will see more insolvency during the years ahead. We are already witnessing a dramatic increase in insolvencies among older Canadians.

Call this Warning Sign No. 2. Since 1990 the rate of insolvency among Canadians 55 and older has shot up by more than 500%. It is a striking and worrisome fact that more and more Canadians are reaching the end of their working lives encumbered by debt. It seems that as the boomer generation edges into their 60s, a significant number are finding themselves unprepared for retirement.

This brings us to Warning Sign No. 3: our fascination with real estate. One reason that so many Canadians — even older Canadians — have large amounts of debt is because of our growing reliance on real estate and hence mortgages and lines of credit backed by this real estate. Back in the mid-1990s, real estate constituted about a third of a typical household’s assets. It now accounts for 40%.  If real estate prices remain strong, our willingness to go into debt to buy homes will be justified. But our wealth could take a major hit if prices dip.

Looking ahead

We can take some comfort in the resilience of our economy. Sure, you’ve probably lost money, as have most of us. But despite the plunging stock market and dismal economy, we are still a bit richer than we were back in 2000.

That said, we should be conscious of the risks around us. Inequality is a pressing issue and could become even more so as trends continue. Meanwhile, unprecedented levels of personal debt and a frothy home market add up to a dangerous combination. If you don’t think that a U.S.-style housing crash could happen here, think again. Canadians are now carrying debt levels very similar to the ones in the U.S. before its economy began to implode in 2006.

If one theme deserves to dominate the next few years, it’s the rebuilding of personal balance sheets. Given our high amounts of debt and heavy reliance upon real estate, it would make sense for most of us to pay down our loans and diversify our assets.

Every situation is different, of course. But we hope that we’ve given you the tools to see how your finances compare to other Canadians and help you to make the right decisions for you.

Roger Sauvé is President of People Patterns Consulting and author of The Current State of Canadian Family Finances published each year by the Vanier Institute of the Family.