So you're worried you haven't saved enough for your retirement What if all the conventional wisdom is wrong and you are actually saving too much
It's only a percentage but it just happens to be the one on which much of retirement planning is predicated. The long-held belief that you need 70% of your working income for retirement — ie. $70,000, if you were making $100,000 — may be based on a number of factors that don't apply.
Fred Vettese, chief actuary at Morneau Shepell, says the level was settled on based solely on the fact you don't have to save once retired and face lower tax levels. “In real life there are other expenses that no longer exist anymore,” he says.
Those missing expenses are the real key. Are your kids out of the house If they are, you need significantly less money. Hopefully, your house is paid off too. And then there's employment expenses like transportation costs that come down.
“When you do the math, and put in some reasonable costs for all that, the percentage you need after retirement is a lot closer to 50% than it is to 70%,” said Mr. Vettese.In a recent paper, he says Canadians are going to have to rely more heavily on savings and pension plans for retirement but notes a couple with $100,000 of household income can reduce that to $51,000 in retirement as the pair eliminate expenses like childcare, mortgage payments, employment costs, saving for retirement and benefit from better tax treatment.
That percentage goes down to 43% if they managed to save a little during their working years — 6.5% of their income for 35 years by Mr. Vettese's calculation. “For people with higher income, what they need is closer to 40% to 45% as opposed to 70%,” he says.
All of this assumes people will want to maintain the same lifestyle in retirement. “Everybody has an 85-year-old mother or grandmother who hardly spends any money. There is some evidence people are more frugal in retirement,” says Mr. Vettese, noting Statistics Canada shows people save more at age 80 than 40. “You think about it and ask ‘why would someone at age 80 be saving' and the answer is they are just not spending.”
He breaks retirement into three phases. “We plan for retirement, we just think about phase one, that's where you are a tad older when you want to do your world traveling and scuba diving,” says the actuary, adding when you hit phase two around 75 you have slowed down. By phase three you are probably in a retirement home.
The reality is that the 70% threshold probably sets you up for a far more luxurious lifestyle than you ever had during your working years. Who really travels around the globe during their working years
“That's the thing. People plan to do all this traveling in their retirement and they don't,” says Mr. Vettese.
Brian Burlacoff, a certified financial planner with Sun Life Financial, says he's been in the business for 20 years and it comes down to the client. “I have people who could retire on 60% of salary and others who could retire on 120%,” he says.
Mr. Burlacoff said the 70% was an old rule of thumb and doesn't take into account that people in retirement are more active than they have ever been and says people who are 75 behave like they are 55. “They can do it because they are healthier,” he says.
He says rising health-care costs will drive up their needs, especially if they want to be covered for something not paid for by a provincial health plan. Long-term insurance coverage is something he says clients need to consider.
One thing he says clients must do is sometimes reconsider their plan based on economic circumstances, some outside their control. “[A financial plan] is not static, it's dynamic. If inflation is higher than expected two or three years after retirement the plan has to be reviewed so you can tell your client ‘hey, you better slow down your spending',” says Mr. Burlacoff.
The aging population is also affecting some assumptions. Statistics Canada, in its report called the , said last month there were 5,825 centenarians in Canada — a 25.7% jump from 2006.
Mr. Burlacoff says products like annuities and segregated funds which guarantee a certain amount of income for the rest of your life continue to be popular. “But they are not the be all and end all,” he says, noting he had an 80-year-old client with $800,000 in assets who came to his office worried about making that money last 20 more years.
The issue ultimately comes down to standard of living. If you raise your income retirement threshold up to 80% or even 120% of the income in your working years, your financial plan has to change to match those goals. Are you going to save more for retirement, work longer or live more frugally in retirement
“You have to manage those expectations,” says Mr. Burlacoff. “We have people come into the office and they want to retire at 63 and they have to work to 68 or to 70 to reach their goals.”
David Foot, demographer and author of , says there is nothing wrong with the idea of them working longer. He says the last census reinforces the view that the entire idea of retirement will have to be rethought. “Life expectancy has been going up two years a decade and so increasingly this idea of using 65 as old age is irrelevant,” says Mr. Foot. “I think 75 would be a better number [to think of as a retirement age.]”
Craig Alexander, chief economist with Toronto-Dominion Bank, says falling short of the 70% goal is not a catastrophe. “A lot of it is income level. Someone with $200,000 may not need $140,000 to have an acceptable lifestyle,” he says.
By the same token, if you are low income, he adds, government programs will get you closer to that 70% without even saving. “People with extremely low income, the government support programs can replace more than 70%. As you move up the income scale, there is a bigger onus to save in order to maintain your current standard of living,” says Mr. Alexander.
Ultimately, he says how much you need comes down to what you want out of retirement and that 70% rule might make no sense.
“If you are happy sitting on the porch reading the newspaper, you need a lot less money,” says Mr. Alexander.