Fidelity’s ‘Scary’ Retirement Findings

October 24, 2007


Jon Chevreau and Rob Carrick have weighed in on the latest Fidelity study that finds that “Canadians are on track to replace only 50% of their pre-retirement income once they retire”. Fidelity continues to insist that this is well short of the “recommended 80% level” despite the shaky assumptions in their original research and another extensive study by Malcolm Hamilton showing that the replacement level on average is closer to 50%.

I don’t have a lot to add to their comments, since we’ve talked a lot about this topic already but you might find the nifty online “Retirement Readiness Snapshot calculator” interesting. The calculator allows you to play with different assumptions and check to see if you are on track for retirement. You can ignore Fidelity’s math and just enter the income you think you’ll need in retirement. For example, I figure we’ll need $60,000 per year in today’s dollars to retire when I am 55, so I entered $75,000 as my current annual income. The calculator tells us that we’ll need about $2 million in savings (in future dollars), which works out to $1.3 million in today’s dollars if inflation is around 2%. Despite the drawbacks of the study, Fidelity’s retirement number seems to be a reasonably conservative estimate (given that CPP/QPP and OAS benefits are estimated for an individual and not for a couple).

A Home is a Nest, Not a Nest Egg

July 4, 2007


While a fully paid-off home is half a step toward retirement, it is equally important to have an investment portfolio consisting of various asset classes to provide income when we have stopped working. Perhaps due to a long string of strong gains in housing prices, many people seem to believe that their home is an “investment” that will support them in retirement. A recent column in The Wall Street Journal shows why houses are not very good investments and relying on your primary residence as a savings strategy is not a good idea. The article makes some good points:

  • Homeowners simply subtract the price paid from the selling price to figure how much “profit” they made without accounting for interest expenses, taxes, maintenance and home improvements.
  • Houses are not such great investments over the long-term if you figure in all the extra expenses of being a homeowner. Depending on the area, you could do a lot better, or a lot worse.
  • The best way to rein in home ownership costs are to pay down the mortgage as fast as possible and avoid costly renovations.

I do feel though that the article is over reaching to make its point. In calculating the costs of owning a home valued at $290,000 over 30 years, they estimate the total costs of maintenance and repair and renovations to be $408,000, which I think is far too high. In my own experience, I find that maintenance costs averages about 2% of the value of the home.

Are Canadians Saving Enough For Retirement? Part 2

June 15, 2007


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.