I received a copy of the research report by the Canadian Institute of Actuaries (thanks to Riscario Insider for the link) that estimated how much Canadians in their early to mid-40s need to save for retirement. They estimate this number by assuming that a senior one-person household would spend the same average $24,909 it did in 2003 (adjusted for inflation) and a retired couple would spend $43,717 on basic living expenses (food, shelter, clothing, transportation, health care, energy and taxes). After accounting for how much of these expenses will be covered by OAS, CPP/QPP, the authors calculate how much of the shortfall must be supplied by a combination of retirement savings and home equity. The authors conclude that a single person earning $40,000 needs to save 14% to 20% of annual earnings to cover non-discretionary expenses in retirement (not including home equity). A couple with a combined annual income of $80,000 need to save 12% to 18% of their earnings.

As with any study of this nature, the conclusions are very sensitive to what assumptions are made. I think two key assumptions made in the study are questionable:

  1. According to actuary Malcolm Hamilton (who based his conclusions based on a 1997 survey), the median retired senior couple needs $24,700 for all spending, not just necessary expenses. Fully retired unattached seniors need only $15,000. His estimates are significantly less than the assumptions made in this study.
  2. The study assumes that retirement portfolios will generate the same returns as Government of Canada bonds adjusted for various inflation assumptions. The return assumptions are far too conservative for a fully diversified, low-cost portfolio with a significant exposure to equities suitable for an investor with a 25-year+ time frame.