Today's economy

How much do you need to save to retire?

By Kevin Press,

Comments (23)

It is not uncommon for personal finance experts to say one requires 60% to 70% of his or her annual pre-retirement income in order to retire comfortably, but a new book suggests that’s an unnecessarily high goal. The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen, coauthored by Bill Morneau and Fred Vettese of Morneau Shepell recommends Canadians aim to replace between 40% and 60% of their annual income.

A couple is planning for their retirement fund.“Fears of a retirement crisis are overblown in Canada,” said Vettese, Morneau Shepell’s chief actuary. He and I spoke on Monday. “I’m not telling people they shouldn’t be saving for retirement. I’m saying they shouldn’t be going overboard and depriving themselves too much of a decent lifestyle during their working life.”

This of course runs contrary to a lot of what we hear about how prepared Canadians are for retirement. In the country’s private sector, less than a quarter of workers have access to an employer-sponsored defined benefit pension plan. About 70% have no employer plan at all. And less than one-third of Canadians save money in a registered retirement savings plan each year.

But even if you’re not comfortable adopting Vettese’s numbers in your own plan, his argument is worth a listen.

Vettese lists four types of expenses that most Canadians face before they retire: mortgage payments, child-related expenses, employment-related expenses and retirement savings. Strip those out, and Vettese calculates we live on less than half of our actual take-home pay each year.

Post-retirement, those expenses disappear. Assuming you retire without mortgage or any other significant debt, your day-to-day needs fall somewhere in the 40% to 60% range of what you made before you retired. “Why is it suddenly, at the point of retirement, you need to have 70%?” Vettese asked me.

In fact, Vettese said his numbers are conservative. He has assumed, for example, that retirees don’t take out a reverse mortgage on their home. He has also assumed that retirees have no other sources of income such as an inheritance or additional personal savings.

I asked Vettese if this makes annuitizing a relatively large percentage of your retirement savings (along with a portfolio of suitable insurance products) worth considering. If you only need about half your pre-retirement income, should you just go ahead and lock that in? “One could make that kind of an argument,” he said. “Annuities are a surprisingly good deal by the time one hits 75 or so.”

I’ve known Vettese a long time, and I have a lot of respect for his work. One aspect of this makes me uneasy though: healthcare expenses. Can we count on access to government-funded healthcare at current levels? Won’t the capacity of governments across the country to pay our health costs be diminished by the sheer numbers of aging baby boomers who require access to care?

The affect this will have on retirement plans may be overstated, Vettese told me. While it’s prudent to expect an offloading of costs by governments, he believes that will result primarily in user fees targeted at working-age Canadians and well-off seniors. “I don’t believe we’re ever going to reach the stage in this country where healthcare is denied somebody because of a lack of income,” he said.

To the extent you agree with that call, a recalculation of your retirement income needs might be in order. Remember, though, that Vettese is talking about needs, not desires. Canadians who want a more comfortable standard of living in retirement may find a drop to 40% or so of their pre-retirement income unacceptable.

For more retirement planning tips, read:

Retirement savings Get more bright ideas on saving for retirement.

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Dwaine Ingarfield on

Important not to save too much.
Dwaine Ingarfield

Dwaine Ingarfield on

Good article. Important for people to think about retirement early in life.
Dwaine Ingarfield

Simard Pierre on

I read all these comments. The author is wrong. My wife and I have been retired for ten years now. We need 110% of our income to live a decent life — read good food, good wine, travel, cars, boats, etc. You have more time on your plate during retirement. You spend more. I suggest that you build a good portfolio. Stay away from mutual funds. This is a ripoff. Buy Canadian Banks privileged shares and enjoy the dividends for your life time.

    XxMYxKILLxX on

    First off…this is Canada…and for most if not all….there is absolute no reason to put away for retirement. It is a false illusion and mostly one’s own self fulfilling prophecy…that you need all this money for retirement. Your going to be 60 to 65. What on earth do you need a 3000 square foot house and a boat for?? You have at best maybe 10 years left to live. The government gives you 1500.00 to 2500.00 to live off from old age pension and Canada pension. You would have to be mentally deficient if you can not figure out a way to live happy off that much a month. And this msg to all you cry babies that say the “baby boomers” are eating all the monies up..LOL.. Don’t be stupid… the money the “baby boomers” are eating stems from the investment they made into their cpp…has nothing to do with “your” monies”…or how much will be there..when you retire. I will say it is good to “bank” for the future..if you want to live a life of luxury…LOL _yeah ..when your 70 yrs old…however..think of all the fun you should of had by spending most of that money on yourself while your young and alive and can still enjoy it….seriously….!!!

      illalwaysbebarbie on

      Don’t know where you are getting your figures of the government paying 2500 per month for cpp and oas. the gov pays a maximum of 1004 and change plus 550 oas.. so go figure… this is a total of 1555 per month. and this
      represents if you are widowed and are eligible for a portion of your late spouse’s cpp after working your whole life and contributing to the maximum

retirement income on

The percentage depends on the lifestyle of a person. If anyone wants to lead a very high lifestyle after his retirement then he may have to require more than 70% of his or her annual pre-retirement income in order to retire comfortably. Several online retirement calculators are there which can help you to calculate how much you should have in your bank account before your retirement to get best retirement income.

Irene on

Healthcare costs will eat up the gap between your working stage expenses and your retirement expenses. Shortage of nursing homes, long waiting lists for surgery requiring trips outside of Canada, shortening of ER times reducing ALC recovery days so you have to go home (hire a PSW 7×24 at $25/hr) or go to a retirement home for rehab (CCAC providing minimal free hours). The disastrous healthcare system here means you need to save up at least $110,000 a year just for a caregiver in your latter years.

    RWM on

    Point taken but we still have to be realistic. Most people do not even earn $100K a year never mind saving that much for health care costs in retirement. If that were the case, one would be far better off investing time rather than money in staying active and adopting healthy lifestyle habits rather than trying to work and save for nursing home care. I still maintain that much of the hoopla surrounding retirement costs is coming from the investment community who are trying to scare people into saving ever greater amounts of money simply to line their own pockets. Nothing wrong with it however if you can afford it. It makes me wonder how my great-great grandmother who lived to be 102 years old managed that long without all this extensive health care we have today.

    Donny on

    Just be glad you don’t live in the United States. You
    tend to generalize and exaggerate. Canada has one of the best health care systems in the world, and we as Canadians know it!

      Jamison on

      Actually Canada’s healthcare system is a disgrace, all you have to do is look at the UK, France and Germany. Our system may be better than the U.S but then that isn’t saying much, is it?

David on

This article doesn’t actually answer the question posed in the title. 60% to 70% of your pre-retirement income is the amount your savings must produce each year of retirement. The question people want answered is “how much money do I have to have invested in assets in order to be financially secure”. This is much more complicated and depends on your rate of return, the rate at which your income needs rise as you pay others to do things you did for yourself when young, etc.

The analysis is something like ” (annual income x 7 x 7% return = 50% of your pre-retirement income) or (annual income x 13 x 5% return = 65% of your pre-retirement income)

How many readers will have 13 years of gross income invested in income-producing assets when they retire? Remember people, your home is not an asset unless you rent part of it out, or take a reverse mortgage that pays out longer than you plan to live.

SteveC on

This view makes a few assumptions… first, a retired person no longer has certain expenses ie child related expenses, employment related expenses, retirement saving and mortgage payments. There is a relatively small percentage of people that actually have paid off their homes. In reality, many rent or continue to rent from the bank and those expenses along with heat, electricity etc remain. While child care expenses disappear, health care and related costs increase. If we assum that a person will stay at home much of the time, utility costs will increase. People are more likely to spend time visiting family and/or travelling whereby those costs will appear. Personally, I tend to spend more on my days off then when working.

It’s irresponsible to encourage people to reduce their savings in this manner with so many procrastinating saving anything at all. In addition, to tell people that they will be able to retire on 40% of what they can’t live on now is not acceptable..

    More Truth on

    On healthcare costs — there have been numerous studies to show that the majority of costs are assumed in the last year of life.

    For those of you who think higher utility bills and tanks of gas negate the gap left by expenses in child rearing and mortgage payments…get a grip. You could leave your lights on 24/7 and drive around all day long and your costs would never match the behemoth pocket-book drains of a child and a mortgage.

    Of more importance than size of portfolio is re-training your brain.
    Our society is based on a buy-it-now-with-credit mentality.
    We are programmed to fulfill our desires first and with immediacy.
    Yet by accumulating desires now, one must save even more to continue the same life-style in retirement.
    But most people spend instead of save.
    After a life-time of acting in such a manner, yes, it will be difficult for most to live on needs only.

    I have not yet read the book but I have read his 2010 papers which are the basis for the book.

    It is quality and realistic.
    Unlike that of the mutual fund/RRSP industry.

    Save and enjoy life.

My Financial Independence Journey on

I’m not Canadian, but I’ve never been a fan of basing my retirement decisions off an arbitrarily chosen percentage of my current income. I base how much I need to retire (be financially independent) off how my current expenses. Then I throw in a nice buffer on top of that.

I will agree that some expenses will disappear, but many of these will probably be replaced by new expenses. In the US, we can expect that health care expenses will rise as you get older. I would also expect that new expenses are gained as retirees start filling up their lives with non-work activities, many of which cost money. And a lot of DIY activities become not so DIY as you get older – yard care, auto care, home repairs, snow removal.

I worry that by advocating for a much lower savings bar, Vettese is going to wind up setting a lot of individuals up to be very poor in retirement.

Jammi Rao (@jammi1710) on

The Article stops short of questioning the whole logic of basing one’s expenses during Retirement as a percentage of income just before retirement. If we all agree that there is a basic minimum that we need to live, then that number (adjusted for inflation) is what we should put down as our Retirement expenses budget and plan for. Clearly this would be built bottom up… so much for food, clothes, car expenses, eating out etc. For Example someone making a 100,000 before retirement and someone making 40,000 before retirement would both probably need 36000 ( built up as a list of necessary expenses during retirement). But for the higher income person this is just 36% whereas for the lower income person it is 90%.

    Kevin Press on

    That’s a great point Jammi, thanks. Doesn’t a percentage calculation (rough though it may be) help one determine what it will take to maintain a pre-retirement lifestyle? Is there no value in basing your bottom-up calculation on what you were earning/spending before retirement?

RWM on

I have a sense that Mr. Vettesse is on to something. The mutual fund industry in particular did a lot of fear mongering back in the 1980s and 90s as a way of garnering more investors once average Canadians became more knowledgeable and comfortable about investing in mutual funds.

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SJ on

Finally, common sense take on retirement savings. Can’t wait to read the book. I have been telling friends and family for years that if you calculate your actual expenses you will find you need much less in retirement savings than traditionally told. A few other tidbits: people need to factor in CPP and OAS, impact of inflation, and a realistic rate of return into their retirement calculations.

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