Saving for retirement: we’re all stressing about it. Are you saving enough? Are your investments helping or hindering? Do you find yourself anxiously rechecking the savings numbers for your retirement plan and wondering – Where did I go wrong?
If you’ve invested your time and effort in creating a detailed financial plan, and you’re still not seeing your savings meet their annual savings targets – maybe there’s a reason. Maybe you’re using the wrong number in your financial plan. Maybe you’ve based everything on a total fiction of numbers.
Is 70% really the standard?
If you’re working with an advisor or read financial planning articles, no doubt you’ve accepted the standard retirement number – “in retirement, you will need 70% of your pre-retirement income” – really?
For example, standard retirement planning states that if your family earns $100,000 annually before retirement, you will require $70,000 of income in your retirement. For simplicity sake, let’s assume you and your spouse will receive $24,000 in annual pension income (OAS, CPP, QPP, etc.) and the balance ($46,000) will come from your RRSPs and non-registered savings.
So, in today’s low interest rate and tough investment climate, let’s say you can safely earn 4.0 per cent on your savings in retirement. With a little simple math, you determine that you will need to save a total of $1,150,000.00 if your retirement is going to support your expected lifestyle. So, according to the standard retirement planning committees, your simple plan says you need have savings equal to $1,150,000 before you can retire!
Reach a little lower
But what if that widely accepted 70% of pre-retirement number is garbage? What if the number is actually lower – closer to the range of 60%, 50% or 40%? It’s easy to see why the investment industry would want you to save the 70% – they want you to save as much as you possibly can. Think about it: the more of your money they can play with, the more money they can make. So, what if in reality you only needed 43% of your pre-retirement income in retirement? What would your new retirement planning numbers look like then?
New numbers on the block
I didn’t just pull that number out of thin air. That’s the number recommended by the retirement experts over at Morneau Shepell.
In a recent article of theirs, they suggest that the real retirement planning numbers for Canadians should be much less than the accepted 70%: “Last time, we showed that a working couple with two children and household earnings of $100,000 could maintain their lifestyle in retirement with income of just $51,000 a year (51%) from CPP, OAS and RRSPs. For the sake of simplicity, this calculation was performed on a pre-tax basis. In our latest analysis … we have reflected the impact of income tax and the results are even more startling. The target retirement income for this particular couple reduces from 51% to only 43%”
So, there you have it. This 43% is a planning number that’s been determined and supported by one of the largest Canadian-based human resources firms, and they know their stuff. So, if we use our same simple example from earlier, but substitute 43% for the standard 70%, how would your financial progress look then?
Let’s say you have $100,000 in pre-retirement income. Planning for only 43% means $43,000 less the $24,000 in retirement pension income. This means the new number that your savings will need in order to generate $19,000 annually in a 4% investment environment is actually $475,000. That’s $475,000 versus the $1,150,000 you’re being told to come up with – a $675,000 difference! (Did you feel that? That was your anxiety and blood pressure dropping.)
Let’s rethink the standard numbers
Take a few minutes to think about this difference. If it’s true that you only need 43% of your pre-retirement income, then maybe you’re not failing.
Maybe you’re closer to retirement than you ever dreamed. And just maybe, you just don’t have to sacrifice so much living today, with the faint hope of enjoying tomorrow instead. The new realistic number lets us all live more peacefully today.