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Maybe you’re saving too much for retirement

How much money do you really need to retire on?
Text + RESET -
Gina Monaco, July 30, 2013 2:32:49 PM

We’re bombarded with messages about retirement savings – that Canadians haven’t saved enough; that company pension plans are underfunded; that the Canada Pension Plan won’t be able to handle the influx of boomers who are set to retire over the next 10 to 15 years. If that’s you, then you might be panicking right now. Stop! According to a new book retirees may not need as much as they’ve been led to believe.

Let’s get real. Spending habits change throughout your lifetime. During your early years, you’re getting an education, buying and upgrading your houses, raising children and sending them through university, and making investments. By the time you retire, your children will be independent and your mortgage is likely paid off. You may also have downsized so your housing costs are likely much lower. Your debt load is likely lower than in your earlier years, and your vehicles are probably paid off. Heck, most likely you’ve sold off that extra car because you and your partner aren’t commuting to work anymore. And if you’re an investor, you are likely reaping the financial benefits from the smart decisions you made early in life.

Here’s what the financial analyst have been telling us – your annual retirement income should be around 70 per cent of your pre-retirement income. However authors of The Real Retirement, Fred Vettese and Bill Morneau, suggest that retirees may only need to save approximately half of that.

The authors argue that the calculation need only look at the portion of preretirement income that’s been allotted to regular consumption. So take out costs associated with children and child care; take out the higher mortgage payments because you’re either mortgage-free or have much smaller mortgage payments, and take out any costs associated with employment. You also need to factor in a lower income tax rate and other additional benefits offered to seniors in Canada. What you have left is considered regular consumption and that is the true cost of retirement living.

According Vettese and Morneau, this calculation is far from the 70 per cent suggested by financial analysts. They found that when the above costs are factored out, regular consumption costs are closer to 30 per cent of total gross income.

Vettese, who is the chief actuary at Morneau Shepell, wrote that most Canadians will have what they need at retirement. Only seven per cent of middle-income households have less than 75 per cent of their pre-retirement income, he wrote.  So soon-to-be retires are in excellent financial shape.  But if you’re in that seven per cent, how much do you really need to save? It’s a big question, but not as big as you probably initially thought. Here are some factors to consider:

  • Company pension plan. If you have been paying into a company pension plan, find out exactly how much it will give you when you retire. Some plans are also matched by your employer. You also have to find out the rules to accessing those funds. Having a realistic idea of what you will get from your company pension plan means you can be more realistic about what you need to save.
  • Government benefits. The Canada Pension Plan and Old Age Security benefits may be small but it’s still something. Find out how much you’re getting at retirement and if you’ll  get the full amount. If it’s $1,000 a month for example, that’s $1000 less you have to save.
  • Part-time employment. A lot of retirees have decided to not stop working, opting instead for part time work to keep busy. If this is something you are planning for, then you can factor that into your calculations.
  • Spending. This is the big one. How much money do you plan to spend? Does your retirement plan include world travel, or a more relaxing lifestyle? Depending on how you answer these questions, your plan to save for that retirement will be different.

It basically comes down to this: the amount you need depends on the lifestyle you choose to have. Once you determine what kind of retirement lifestyle you want, you can then put together a financial plan to achieve it.

If you’re not good with numbers or the thought of trying to make sense of it all is too intimidating, then talk to a financial advisor who can help you navigate the financials and create a plan that works for you.  Happy retirement!

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Gina Monaco

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