Fidelity’s Retirement Math

May 22, 2007


On request, Fidelity Canada graciously sent me a copy of their research article (unfortunately, not available online), which concludes that Canadians should be aiming to replace 75% to 85% of their pre-retirement incomes, not 60% to 70% as conventional retirement planning suggests.

Based on StatsCan data, the research assumes that retirees will be spending the same amount as they did in their working years (reduced work-related expenses, less taxes and no contributions to CPP/QPP etc. offset by higher leisure expenses and health care costs) and estimates how much of their income retirees need to replace, taking into account public pensions such as OAS, CPP and GIS.

The article cites an individual earning $80,000 per year and spending about $52,000 (Earnings minus taxes minus public benefits minus savings) and estimates that the person would need a retirement income of $68,249, of which only about 20% will be supplied by public benefits. The situation is brighter for a retiring couple. A retired couple with a household income of $80,000 need to replace 75% of their pre-retirement income, 40% of which will be covered by government pensions.

I’ve always been sceptical of a one-size-fits-all link between income and spending. While there is definitely a loose link between the two (our spending tends to go up as our incomes rise), in the example above, if the individual saved 25% of his income instead of 10%, he has to replace less of his pre-retirement income and a higher percentage of his retirement income would be supplied by public benefits. Still, the study is a useful step in researching guidelines for how much income we would need in retirement.