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.

This article has 17 comments

  1. Looking at the conclusion where a single person making $40K would have to save up to 20% of their income for retirement made me pause to think. The RRSP program as it is currently written is capped off at 18% of your gross earned income, or $19K whichever is lower. For someone like me who maximizes my RSP contribution every year, that cap is the limiting factor determining how much I save for retirement. So, unless that person making $40K saves for retirement outside of an RRSP (unlikely, as temptation for most Canadians would be too great and they would likely spend it), it would be impossible for them to save the 20% recommended in the study!

    I’ve always wondered what life would be like if the government just removed the cap and said, go ahead and save whatever you possibly can for retirement. I know that I would save more for retirement AND I would be able to lower my personal income taxes. I suspect that the lowering of my personal income taxes part is the reason why our government would never make such a bold move? Aside from that, I don’t see any other downside fron the government’s point of view to having Canadians save lots of extra money for retirement.

  2. But then again, this current government of ours is more likely to say that the RRSP program has too much tax leakage and then just wipe out the program altogether.

  3. Interesting survey.

    I think the amount quoted for a retired couple seems a bit high ($43k) for basic expenses. Our current basic expenses are around $27k per year (not counting mortgage, diapers, commuting costs). Otherwise thre report looks pretty good.

    CC – can you post or email the report to me?


  4. As per the posts in the baby column, I’d like to see the gov’t incentivize child bearing / rearing, rather that focus on lazy boomers etc.

  5. Phil, I think they assume the $40k/year person starts saving at age 40 for retirement so they would have plenty of unused rrsp room.


  6. I am glad to at least hear more about the survey itself.

    I have stated this a few times, I think my generation (I think I am actually part of Gen X) will NOT be able to retire, because of our over spending and over debt laden lives. Now if my kids become rich that may change the equation a little.

    I thought I had a pension coming, unfortunately that changed, but even the 20 years I have in it, will not be insignificant as well. I have a complicated retirement equation that I don’t think I completely comprehend yet. We’ll see.


  7. Phil, you can save money in non-registered accounts. Just use investments that are primarily going to generate capital gains, thereby minimizing taxation issues until you start draw down income from their sale in retirement.

  8. Hi Hepman. I didn’t say that I personally had trouble saving outside of an RSP account. I said that Canadians in general have a tendency to spend everything that isn’t locked into an RSP. This is just from anecdotal observations of behaviour that I’ve witnessed among my friends and co-workers.

  9. Canadian Capitalist

    Top of my wish list is a tax pre-paid account. No tax deduction upfront but no tax on withdrawals. I don’t know why the conservatives dropped this from their plan and instead “promised” a half-baked capital gains exemption idea.

  10. Hi CC. So what you’re talking about is like the Roth IRA down in the USA? The problem with the Roth IRA is that it’s an either/or choice between the traditional IRA and the Roth IRA. Although statistics show that the Roth IRA is better than a traditional IRA, when I worked south of the border, I would still choose the traditional IRA in a heartbeat because I wanted the tax benefit NOW, not later. If we could contribute to BOTH, then heck yeah, I’d be all for it.

    Politicians of all stripes have a tendency to lie in order to get elected. But Harper’s government seems to have lied a lot more than usual. In contrast, the conservative government of Mike Harris actually did most of what he said he would do during his election campaign. He still got lambasted by protesters for doing that, of course.

  11. Canadian Capitalist

    Phil: I am not very familiar with US retirement accounts. The tax pre-paid account that the Tories originally proposed would have been in addition to RRSP accounts. For some reason, they dropped the idea entirely in the last election.

  12. CC,

    Thanks for the summary of the report. I’m glad to see someone was able to get a copy of it.

    I agree in general that a lot of people believe in spending every last dime that comes into the home. I see it in my own extended family. Yet, it is their choice. Live for now and eat dog food in retirement. (Sorry, I couldn’t stop myself from using that old line.)


  13. CD, the problem with your letting them “eat dog food” is that people who are forced to do this will raise hell, until the gov’t steps in and robs from the ants to give to the grasshoppers (and immigrant spiders, if you’ve read that funny take on the old parable). Medicare is the simplified version of this.

    Yes, save the children, and their tax-paying parents, but there comes a point where the cost-benefit analysis breaks down for some senior citizens.

    If senior citizens were forced to pay a percentage of the services required for them, say based on a sliding scale of their tax-receipts for the past 10 or so years (compared to average or median or whatever), then you may compel more people to save for that eventual day when maybe, just maybe, a new hip would come in nice and handy.

    My choices –> spend today or stolen tomorrow = spend today every time. It’s cynical yes, but I spend a lot of time thinking about how wastrels should not get my money just because they out-number me.

  14. CanadianDream, the report is available publicly at http://actuaries.ca/members/publications/2007/Final%20CIA_Retirement_e.pdf (I don’t know how to turn that into a clickable link. You can also go to http://www.actuaries.ca, click on English and you’ll see it on that page)

    If you’re in Toronto and really interested in pensions, you can attend the public launch of “The Prescription for Canada’s Ailing Pension System” on June 25th. The President of the CIA (yes, that’s we members call the Canadian Institute of Actuaries) is the luncheon speaker at the nonprofit Economic Club of Toronto, http://www.ecot.ca.

    I just registered and will likely post at http://riscario.blogspot.com. And no, I don’t have an advance copy of the report.

  15. Canadian Capitalist

    Thanks for the report Promod. I was able to access it, so I’ll update the post with the link.

  16. Thanks, CC. I did attend the public unveiling of the prescription for the woes of Canada’s pension system earlier today. There’s a post at http://riscario.blogspot.com/2007/06/prescription-for-canadas-ailing-pension.html

  17. Canadian Capitalist

    Promod: Thanks for the heads up. I saw your post on the subject too. I am currently reading the report.