Having too much income in retirement is not a problem. Having too little is definitely a problem. Somewhere in between is a mystery number called “enough”. To Frederick Vettese, an actuary and partner at Morneau Shepell and author of Retirement Income for Life, the mystery is why so many Canadians are setting their targets so high.
A cynical response could be that that the advice provided on target income ranges often comes from a source that stands to benefit from encouraging people to over-save and stay invested in the market: namely banks, investment firms and insurance companies. Vettese has another theory. He feels the 70-per-cent rule may have gained the status of conventional wisdom and most people accept it on face value. Another group of people, who are perhaps on the verge of retirement, believe that “spending is what it is and if they haven’t saved enough to generate the retirement income to fund it, then they’ll simply have to spend less. Vettese recommends that all retirees and near-retirees have some target in mind for the simple reason that it helps them calibrate a realistic withdrawal rate that will make their money last as long as possible.
70 per cent may be too high
To understand why 70 per cent may be too high, Vettese suggests that workers should take a close look at their paycheques. “Many items that whittled down your gross salary while you were working,” he says, “are no longer required. For example, you no longer need to contend with payroll deductions and work-related expenses. And for most homeowners, the mortgage is usually paid off by retirement.” Another obvious advantage to retirement is that you are no longer saving for retirement.
So, how much is enough?
Research presented in Retirement Income for Life, suggests “the vast majority of those from middle-income households who retired with enough income to replace 65 to 75 percent of their final average earnings end up with a much higher standard of living in retirement.” The conclusion is that many people save too much.
Consider the example of a couple planning to retire at age 65 with $500,000 in their combined Registered Retirement Savings Plans (RRSPs) and another $50,000 in combined savings in their Tax-Free Savings Accounts (TFSAs). Vettese easily demonstrates how it is possible for them to retire on approximately 50% of their average combined income over the previous 10 years. Two things make this target achievable in retirement.
- Expenses plummet once the kids are self-sufficient, the mortgage is paid off, work-related expenses go away and there is no longer any need to save for retirement.
- Most people over-estimate the percentage of their working income that is actually available for spending. In fact, most people live off less than 40% of their gross annual earnings.
Find your ideal retirement income target
Everyone is different and your retirement income needs will vary based on your lifestyle but setting a realistic target may give you the peace of mind to save a little less and spend more on the things you enjoy in retirement.
Your Lawyers Financial Advisor can help you determine your retirement savings target. Book an appointment with your Advisor and request your free copy of Retirement Income for Life – Getting More Without Saving More by Frederick Vettese.