Retirement Income – How much do you really need?

Before I can help you determine how much money you need to save for retirement; we need to figure out how much money you will actually need to live on during retirement.  The rule of thumb has always been that you will need 70% of your current income.   However, actuary Fred Vettese argues in his recent book The Real Retirement that many Canadians will only need approximately 50%.

Vettese has introduced an idea he calls the neutral retirement income target (NRIT) to describe his theory.  The goal is to first determine how much of your current income goes to day-to-day expenses, and then use this amount to estimate your retirement income goal.  It was found that in several cases retirees could enjoy the same level of consumption on less than half of their pre-retirement income.  Not only do retirees have significantly lower expenses – assuming the kids have moved out and they have paid off their mortgage – but they also enjoy an array of tax benefits that people who are working do not.

For example; a couple with a joint income of $110,000 may contribute 3.8% to RRSPs, spend $1,100 on their children and have a monthly mortgage payment of $1,633.  After you deduct income and payroll taxes (CPP and EI) the couple is left with approximately $46,600 to spend. 

Once retired; the couple will no longer be contributing to their RRSPs, incurring child-rearing expenses or paying off their mortgage.  They will not have to pay CPP or EI premiums, and they will be in a much lower income tax bracket because of the pension credit, age credit and income splitting opportunities.  As a result, they would need an annual income of just $48,300 to fund the same level of consumption they enjoyed while working.  That’s only 44% of their pre-retirement income.

There is no question that everyone’s situation is different and your lifestyle goals will determine how much you will need to save.   The good news is; if Vettese is right; we will only need about half of our current incomes to live a similar lifestyle throughout our retirement.

However, I am not telling you it is ok to save less money, many Canadians are still carrying too much debt and not saving enough as it is.  It is important to have realistic expectations, but if you are paying off your home and saving on a regular basis; chances are you will be just fine.

If you are not sure and want to go over your numbers, give me a call I would be happy to help.

Have a great Thanksgiving,

Tracey

 

 

 

 

 

Source:  Original article posted on Advisor.ca by Dan Bortolotti, 03-05-13