Are we saving too much for retirement?
For most Canadians, the notion may seem ridiculous after years of listening to financial experts lambaste us for our spendthrift ways and warn of trouble ahead.
But there is another side to the worries about a brewing retirement crisis. It’s a viewpoint that insists that a significant number of us may be squirrelling away more than we actually need.
Don’t look upon this debate as permission to squander your wealth. Rather, regard it as an opportunity to assess your own assumptions about whether you’re on track for the retirement you want.
For years, a handy rule of thumb has been that a typical middle-class couple should be saving 10 per cent or more of their annual incomes to position themselves for a comfortable retirement.
It’s a safe bet that many of us aren’t doing that and it adds to fears that Canada is headed for a retirement calamity in decades ahead.
A much quoted report by Kevin Moore, William Robson and Alexandre Laurin, published by the C.D. Howe Institute in 2010, predicted that nearly half of young Canadians – especially those with above-average incomes – will experience a substantial drop in their living standards by the time they quit work.
What’s remarkable, though, is that other experts who survey Canada’s retirement system come to precisely the opposite conclusion.
“At some point, you have to ask whether Canadians on average are saving too much for retirement,” wrote Philip Cross, a former chief economic analyst at Statistics Canada, in a report earlier this year for the Fraser Institute.
Part of the debate centres on how much of your pre-retirement income you need to replace after you quit working to avoid a nasty drop in your lifestyle.
One commonly quoted guideline is that you require at least 70 per cent of your former income. Much depends, though, upon your personal circumstances.
If you’re a childless high-income renter who isn’t saving a penny, then, yes, a drop of nearly a third of your income is likely to change your life in substantial ways: fewer vacations abroad, less ability to splurge on expensive lunches, and so on.
But if you’re a typical middle-class earner with a house and a couple of kids, retirement will probably mean the end of your mortgage and tuition bills. On top of that, you’ll pay less in taxes because your income will be lower.
Many experts, including Malcolm Hamilton of the C.D. Howe Institute, argue that most middle-class couples will be just fine if they replace half their working incomes.
It’s not just about how much you spend, though. Fred Vettese, chief actuary of consultants Morneau Shepell, argues that grim forecasts for retirement tend to ignore the large amounts of wealth that Canadians have built up outside pension plans and RRSPs. He calculates that the value of our homes and non-RRSP financial assets is much larger than our pension and RRSP wealth, and provides a deep pool of savings to draw upon.
Finally, there’s one factor that nearly everyone can agree on – we are working longer and retiring later. If this trend continues, and the average retirement age moves from 62, where it is now, to 65 or even higher, a great deal of the worry about an impending retirement crisis vanishes.
Even three more years of work can make big difference to your retirement picture. A typical person who starts saving at 25 would need to put away 15 per cent a year of their income to retire in good financial shape at 62, but only 10 per cent if he delays his departure from work until 65, and only 7 per cent if he holds off until 67, according to the Center for Retirement Research at Boston College.
Adrian Mastracci, a fee-only financial adviser at KCM Wealth Management in Vancouver, says the problem facing most people is that they have no idea of what a realistic target is for retirement.
Consider the case of a middle-class couple who wants to retire at 65 and has no employer pensions. They expect to receive about $28,600 from Canada Pension Plan and Old Age Security (roughly three-quarters of the combined maximum) and want an annual retirement income of $65,000 to last them until they’re at least 90.
Mr. Mastracci estimates they need to put away about $750,000 in savings. For many of us, that may seem an intimidating amount. For others, though, it’s likely to bring a sigh of relief.
“It’s all about striking a reasonable balance between saving for tomorrow and spending for today,” Mr. Mastracci says.
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Retiring with financial security
Saving rate required for a medium earner to attain a 70-per cent replacement rate
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