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”. It’s a mystery to Frederick Vettese, an actuary and partner at Morneau Shepell and author of Retirement Income for Life, because he wonders why so many Canadians are setting their targets so high.
A cynical response could be 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. So, if you’re about to retire or in the midst of long-term planning, here’s how Frederick Vettese’s top tips for setting a realistic income target.
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 pay cheques. “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.” This higher quality of life is not the result of the money coming in so much as the amount of money going out. Vettese and his team analyzed how much money working-age people have available for regular spending after all of their work-related expenses were paid. Not surprisingly, it costs a lot of money to work. In Retirement Income for Life, Vettese quips that “responsible people who pay their taxes and meet all their other obligations live off a surprisingly small percentage of their gross income (he estimates about 36%).
Work-related expenses are not the only costs that typically decline from the onset of retirement and throughout the following decades. For many Canadian families, retirement coincides with:
Child self-sufficiency - Grown children need less or no financial support. The exception here is the retiree Vettese refers to as The Cleavers.
Mortgage freedom - Many people will pay off their mortgage in advance of retirement. This means they have more to save in the final years of work and significantly lower expenses in retirement.
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.