We have got to stop arguing about whether we have a retirement-savings crisis in this country.
It's a boring, sterile debate that will never conclude with a definitive victory for either side. Most people are somewhere between the extremes of well prepared and unprepared. They need to see where they stand so they know whether to save harder.
The Globe and Mail's new Retirement Readiness Calculator is here to help in this mission. It's designed to compare your income needs in your working years with your estimated living costs after you retire. If you know how much retirement income you need every year, you're well on your way to finding out the total amount of savings you need.
The percentage of your working income you need in your retirement years is called the replacement ratio. Some experts say a ratio of as little as 50 per cent is enough for some people, but 70 per cent is often used as a default. People planning a lush life in retirement may need a ratio close to 100. But these are generalizations. Find out your own personal replacement ratio using our calculator.
We all need to take some personal responsibility for our own retirement readiness, whether it's by using an accredited financial planner or working through the numbers ourselves. Don't be distracted by headlines saying we're doing great at retirement saving, or that there's a crisis.
A report from the Broadbent Institute issued this week said a large percentage of older working people face retirement with insufficient savings. A year ago, the global consulting firm McKinsey & Co. told us 83 per cent of Canadians were on track to keep their standard of living after retirement. These and other reports differ on methodology, emphasis and agenda, so we shouldn't expect unanimity.
But the sharp differences in findings suggest we can't be complacent about our level of retirement readiness. Our Retirement Readiness Calculator can help you in two ways. One, it will help you see how much income you'll need in retirement. Two, it will help you make adjustments in your retirement lifestyle expectations that will cut your income needs.
Take your best shot at computing your personal replacement ratio and then head over to the Canada Retirement Income Calculator to find out if you're saving enough to meet your retirement income needs. This calculator, produced by the federal government, asks for your annual income from all sources and the amount you would like to receive in retirement income. Your personal replacement ratio is how you arrive at this number – just apply it to your working income and away you go.
The Retirement Readiness Calculator highlights how many opportunities there are to spend both less and more in retirement. The good news here is that demands on your cash flow taper off after you leave the work force. For example, you reduce your replacement ratio considerably by not having to save for retirement. Another source of saving is in work-related costs such as bus passes or parking.
The calculator also shows how helpful it is to have your debts paid off before you retire. You need much less retirement income if you don't have to pay a mortgage or make a monthly payment on a line of credit.
Your personal replacement ratio reflects reduced costs in some areas balanced with increased spending in others. Planning to travel more in retirement, or take up expensive hobbies? The calculator gives you an idea of how your income needs would be affected.
Medical and dental costs may also add to your spending needs in retirement. As you age and spend less on travel and activities, expect to spend more on medical expenses such as physiotherapy, prescription drugs not covered by provincial plans, hearing aids, home care and, ultimately for many, long-term care.
The calculator also addresses the cost of supporting adult kids and aging parents. Baby boomers, spend some time thinking about this "sandwich" theme. With our bizarre mix of expensive housing and a slow-growing economy, your kids (and grandchildren) may need your financial help to make ends meet. Check your parents' retirement situation to see if they might need help affording the cost of a long-term-care facility or home care.
If your personal replacement ratio can't be sustained by the savings track you're on now, your options include downgrading your retirement lifestyle a bit, ramping up your savings and working longer. You can also try to earn a better investment return, but anything above 5 per cent is going to be tough.
Rob Carrick