Skip to main content
expert's podium

Few issues draw more debate than how much income Canadians will need to retire comfortably.

Most financial planners and actuaries express this amount as a percentage of a household's pre-retirement income. The "replacement ratio" measures the amount of pre-retirement income that a household requires to maintain its lifestyle in retirement.

The traditional number is 70 per cent. In other words, if your household income immediately before retirement was $100,000, you are supposed to need annual income of $70,000 after you retire to maintain the same standard of living that you enjoyed while working.

Historically, this number was used in the calculation of private pension plans. More recently, it's come under attack by critics who believe it overstates how much most Canadians will need to enjoy retirement. The critics suggest that using the 70-per-cent number is a scare tactic on the part of the financial industry designed to panic Canadians into saving more than they need to, enriching the industry in the process.

Among the most prominent critics of the 70-per-cent number is Malcolm Hamilton, consulting actuary with Mercer, who maintains that many low and middle-income Canadians are so fixated on saving earlier in life that they are unnecessarily depriving themselves of enjoyment.

The 50-per-cent solution

Russell Investments Canada recently released a research study that calls the 70-per-cent number into question and suggests that for many Canadians a replacement ratio just above 50 per cent is adequate.

Delving into Statistics Canada data, Russell analyzed spending by the average household of persons aged 65 to 74 years old, breaking expenditures into three categories. First came essentials - things such as shelter, transportation and food. Next came lifestyle spending - discretionary expenditures on items such as travel, dining out, alcohol and tobacco. What was left (little or nothing for the average retired couple) went into estate savings for things such as charitable bequests or gifts to children.

Russell discovered that in 2007 the average retired household headed by someone 65 to 74 years old had annual expenses of about $30,000, or about $2,500 monthly. A typical household spent about $2,000 a month on essentials and $500 monthly on lifestyle items.

There are three things worth noting about these figures. First, expenditures by these senior households were less than half of the average after-tax income for Canadian couples of $73,500, suggesting that a 50-per-cent replacement rate may be adequate on average. Second, of the total expenditures of $30,000, over $18,000 came from government transfers, including the Canada Pension Plan and Old Age Security. And third, as people get older expenditures declined significantly. Spending on essentials falls a further 30 per cent by the time households hit the 80 to 84 age category.

A caution about averages

Before people reading this decide it's time to splurge with their retirement savings, let me suggest caution.

The biggest caveat relates to the risks of extrapolating from averages. The numbers probably don't apply to retirees in relatively expensive cities such as Montreal, Toronto, Calgary and Vancouver.

They also won't apply to higher income earners. In the Russell study, the top third of households aged 65 to 74 had average expenses of about $54,000. Of this they spent about $38,000 on essentials and approximately $16,000 on lifestyle expenditures.

The good news

Despite the relatively low incomes of senior households, talking to retirees yields good news. Russell's research shows that 90 per cent of retirees talk about enjoying life and experiencing happiness, freedom and relief. This compares with just over half of Canadians 10 years prior to retirement who expect to feel that way once retired.

Surveys of seniors overwhelmingly suggest that higher incomes don't drive satisfaction in retirement. That said, there is a minimum threshold of income required to enjoy retirement. The economic and market downturn of the past two years has changed views on many issues. A survey by Russell conducted late last year suggested that almost 40 per cent of Canadians have lost confidence that they will have what they need in retirement - although the facts suggest these fears may be overstated.

For many, the first step to rebuilding confidence about the ability to fund an enjoyable retirement is developing a firm understanding of likely costs. And for Canadians looking to do that, the Statistics Canada data on retirement costs and the Russell framework dividing retirement expenses into essentials, lifestyle and estate categories are a good place to begin.