Good news: new numbers for retirement planning
I know. I know. We’re all stressing about it. Are you saving enough? Are your investments helping or hindering? Are you anxiously rechecking your savings numbers for your retirement plan and wondering – Where did I go wrong?
If you’re one of those rare Canadians that invested your time and effort to develop a detailed financial plan and despite all your hard work to meet the set annual savings targets, you’re still not managing to get your savings to stick to the plan, then 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.
Standard retirement planning vs. the new planning numbers
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, the 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% 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. (Note: I don’t really care what rate of return you want to use, read on to see why the rate of return is not that important!)
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. So, how are you doing so far?
Garbage in – garbage out!
But what if that widely accepted 70% of pre-retirement number is garbage? What if the number is actually lower – something more like 60%, 50%, 40%?
It’s easy to see why the investment industry would want you to save the 70%, i.e. 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, presented below, 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%. – Vision, January, 2011
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?
Quickly, $100,000 of pre-retirement income, means 43% in retirement translates into a retirement income of $43,000 less the $24,000 in retirement pension income, which now means with the new number that your savings will need to generate annually $19,000 in a 4.0% investment environment, your new retirement savings goal requires you to accumulate $475,000.
Woohoo! Retirement savings of $1,150,000 (using the standard old plan numbers) vs. $475,000 with this new planning number. That’s a difference of $675,000 that you’re being told to come up with! (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 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.