charting retirement

Last week’s chart showed that saving 12 per cent a year for 30 years resulted in retirement income at age 60 equal to a paltry 33 per cent of final average pay, including CPP pension. This is Scenario D in the chart.

It didn’t include OAS pension, however, and didn’t pick the optimal age to start CPP pension. If we include OAS and start both CPP and OAS pensions at age 70, retirement income is much higher (Scenario C).

Retirement income as a percentage

of final average pay

Based on saving 12% a year for 30 years

Income target:

50%

A - Retire at 64, income optimized

62%

B - Retire at 62, income optimized

57%

C - Retire at 60, income optimized

50%

D - Retire at 60, income not optimized

33%

THE GLOBE AND MAIL, SOURCE: AUTHOR’S

CALCULATIONS USING THE PERC CALCULATOR

FOUND AT PERC-PRO.CA

Retirement income as a percentage

of final average pay

Based on saving 12% a year for 30 years

Income target:

50%

A - Retire at 64, income optimized

62%

B - Retire at 62, income optimized

57%

C - Retire at 60, income optimized

50%

D - Retire at 60, income not optimized

33%

THE GLOBE AND MAIL, SOURCE: AUTHOR’S CALCULATIONS

USING THE PERC CALCULATOR FOUND AT PERC-PRO.CA

Retirement income as a percentage of final average pay

Based on saving 12% a year for 30 years

Income target:

50%

A - Retire at 64, income optimized

62%

B - Retire at 62, income optimized

57%

C - Retire at 60, income optimized

50%

D - Retire at 60, income not optimized

33%

THE GLOBE AND MAIL, SOURCE: AUTHOR’S CALCULATIONS USING THE PERC CALCULATOR FOUND AT PERC-PRO.CA

Even though the retiree now reaches what I consider the minimum threshold for adequate retirement income – about 50 per cent of final pay if he has paid off the mortgage on his house – he would probably want a cushion.

That is because the investment returns that were used in this income projection were fairly optimistic and might not be achieved. (The investment and inflation assumptions were taken from the CPP actuarial report.)

If this retiree worked and saved two years longer and retired at 62 (Scenario B), his retirement income shoots up to 57 per cent of final average pay, assuming once again that he has optimized his retirement strategy. And if he waits until age 64 (Scenario A), his retirement income is now a comfortable 62 per cent of his final average pay, which should enable him to surpass his preretirement standard of living.

There are two takeaways from this brief analysis. First, saving 12 per cent of pay over a working career is a fairly good rule of thumb, provided that you make the right decisions about investments and when to start CPP and OAS pensions. Second, deferring your retirement date a year or two – or three – can dramatically improve your retirement income.

Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.