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If your income is half the average earnings in Canada, you may not need to set aside additional funds for retirement from your earnings. Instead, a combination of mandatory public and private pensions could cover you up to and even beyond the target replacement rate.

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Not everyone needs to save for retirement. Some Canadians will have enough income to fund their postwork lives without ever setting aside a dime in their own savings accounts. How do you know whether you're one of them?

The answer hinges on how much you'll get automatically from the retirement income sources you build up by living and working in Canada.

A target to aim for

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The Organization for Economic Co-operation and Development (OECD) tracks retirement income data across its 34 member countries – and has established a "target replacement rate" for retirement income.

According to the OECD, retirees should aim to have 60 per cent of their gross pre-retirement income once they hang up their lunch buckets or turn in their office keys in order to maintain their standard of living as they age.

Across the OECD, the average gross replacement rate for the worker earning an average income is about 54 per cent.

In Canada, retirees can typically expect to receive guaranteed lifetime income from Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Canada Pension Plan (CPP), in addition to any other workplace pension income they might also receive.

A focus on retirement income, not retirement savings

Looking at Canada, the United States, Britain, Australia and New Zealand – collectively known as the Anglo-Saxon economies – retirees earning the average income can expect to receive between about one-third (in Britain) to one-half (in Australia) of their working income from guaranteed pensions once they hit retirement.

The OECD calculated these percentages by adding up the income from government and mandatory private pensions (such as CPP in Canada), and comparing it with earnings in member countries.

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What if you aren't earning the average income, but something less – or more? Here's where the numbers get interesting: If you earn a lot more than the average income before retirement, you can expect to get a lot less, in percentage terms, of guaranteed lifetime pensions in retirement.

The accompanying table (below) shows the OECD's calculation of gross "replacement rates" for workers earning average, low (defined as half the average) and high incomes (defined as one-and-a-half times the average).

What it suggests is that, at least in some of these countries, if you earn half of the average income, you might have 80 per cent or more of your working income replaced in retirement from mandatory public and private sources that you can't outlive.

On the other side of the ledger, however, the replacement rate from guaranteed sources drops off significantly: Retirees earning one-and-a-half times the average income might need to replace roughly 75 per cent or more of their preretirement income to hit the recommended target.

How does your plan hold up?

Here's the surprising takeaway: If your income is half the average earnings in Canada, you may not need to set aside additional funds for retirement from your earnings.

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Instead, a combination of mandatory public and private pensions could cover you up to and even beyond the target replacement rate.

And if you earn close to the average income (which Statistics Canada tells us is about $50,000 for an individual in Canada) to get up to the target replacement rate recommended by the OECD, you'll need to have some savings set aside to fill your "retirement income gap."

But the real retirement income challenge is for people earning more than the average, and the challenge rises as income rises.

Replacement rate as a benchmark

Now, you may disagree with the idea of 60 per cent of preretirement income as a benchmark. In fact, you can set your personal target replacement rate at 20 per cent, 40 per cent, 70 per cent or any other rate you choose. Yet one takeaway seems clear: The need for retirement income planning is greatest when income is highest – because Canada's existing mix of mandatory public and private pensions is not sufficient to fill the gap.

Bottom line: If your income is in the middle of the pack or below, your retirement income plan can be as simple as ensuring you build up sufficient years of CPP coverage, which you will add to OAS and GIS once you retire. However, if your income is above average, you'll need to plan carefully during your working years to ensure the gap between what you'll get from guaranteed sources and what you want in retirement gets filled.

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Alexandra Macqueen, CFP, teaches and writes about finance in Toronto. She is co-author of Pensionize Your Nest Egg: How to use Product Allocation to Create Guaranteed Income in Retirement.

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