In a report released Thursday, Doug Porter says savings rates — which are currently at three to four per cent — will need to rise to nine per cent given subdued investment returns.
"We think Canadians have done a good job over the last 25 years preparing for retirement," Porter said in an interview from Ottawa.
"But unfortunately, the issue now is because of the sustained decline of interest rates and the likelihood of relatively modest financial market returns in the years ahead... Canadians will have to aim a little bit higher to meet their retirement goals."
A balanced portofolio of cash, bonds and stocks can be expected to produce long-run returns of between 5.25 and 6.25 per cent, the report states.
Those modest returns along with inflation rates of two per cent mean Canadians need to boost their savings rate dramatically, it says.
According to the BMO paper titled "Savings Grace: Equity Rally," co-written by senior economist Robert Kavcic, Canadians will now likely need 18 times their desired retirement incomes to retire comfortably.
"We continue to believe that return expectations should err on the conservative side of historic norms," says the report.
"The relentless decline in interest rates likely implies little more than three per cent total returns from the bond market over the next decade or so."
Porter said the difficulty is that, traditionally, Canadians come to expect their invested retirement savings will bring an average return of eight per cent, which is no longer realistic.
"I do think investors have to be realistic in terms of what they can expect over the medium to long haul," he said. "Our assumptions are reasonable. I wouldn't say they're overly cautious."
The report suggests Canadians can make up for the savings shortfall through various ways, including downsizing their current residences, lowering their retirement goals and the amount of time they think they need to save for, or more likely, staying at their jobs past the age of 65.