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.

This article has 19 comments

  1. Hi CC, I’m curious if you had considered enjoying half your retirement in exotic countries like Thailand and Malaysia. Can you believe it’s actually cheaper to be on vacation than to stay at home? The only catch is the durations must be long enough to minimize the costs of international flights.

    I have a few more thoughts on this, but might go too off topic.

  2. Retire on an island, that would be my definition of retirement! However, I think that you also have to consider your retirement goals, horizon investment and spending habits before considering how much you need of your actual income to retire. If you plan to travel all around the world of if you prefer to stay home and do some gardening, your retirement plan will be completely different.

  3. I’m surprised they even had a report to send you. I had assumed their marketing department had pulled the 80% figure out of thin air or maybe Peter Drake (the Fidelity retirement spokesman) asked some of his millionaire neighbours if they would prefer 80% or 70% of their pre-retirement income in retirement?

    Regardless, they are just trying to move more of their product which is what businesses do.

  4. I’d love to read the research article. Any chance you could post or e-mail it?

    I don’t think I agree with their conclusions, but it’s hard to criticize them without knowing how they came to those figures.

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  6. Canadian Capitalist

    George: I am not sure if I am allowed to email the article. However, I simply contacted their media centre and they sent the report by email. You can find the contacts here.

    Like I noted they base their assumption that spending doesn’t go down in retirement on StatsCan studies. I’ll try and dig up that article (should be available in the local library).

  7. My concern is for newcomers. They may not have the time to reach a comfortable level of retirement. I would like to see something more realistic than 80%. My retired nextdoor neighbour told me that with $3000 a month should be sufficient for 2 people.

  8. In my opinion, FJ and FB are at least on the right line of thinking. I’m not so sure about retiring to countries where their health care services are at least considered “suspect” if not sub-standard. However, there are many low cost areas in Canada, for example, such as the maritimes where I’m originally from, or in the prairies (excluding Alberta whose economy is going crazy). Me personally, I can’t see myself retiring in Toronto, it’s definitely NOT a low cost city. You can also be a snowbird and live in the USA for the harshest of winter months and have your medical bills be covered by relatively inexpensive Canadian travel insurance, should anything happen while you’re down there. Then you get great service and still have better insurance coverage than most Americans have!

  9. At the end of the day, this report basically seems to conclude: “Canadians need to save more for retirement than they are.”

    Saving for retirement is a good thing to do in general. But getting bogged down with fear-mongering ratios of how much the price of cat food will be in 2048? Consider the source.

  10. It’s odd that the article isn’t available electronically.

    The idea of retiring somewhere exotic and cheaper is intriguing, but how likely is it that we’d really move from the place that’s been home for years?

    As Phil S points out, health care is a big concern. We have a retired neighbour who moved back from cottage country to Toronto after a heart attack. The reason? Medical treatment.

    We don’t expect to get sick, but it’s reassuring to know that medical care is nearby.

  11. CC: I’ve e-mailed the Fidelity contact that was listed on their press release, and asked that they e-mail me the full report.

    As far as the StatsCan study is concerned, have you looked for it online? StatsCan puts tons of their material on their web site – http://www.statscan.ca.

  12. To Riscario Insider: Cottage living is really difficult for access to medical services. But there’s nothing that says you can’t move to a town or small city in cottage country. I don’t go up to cottage country personally enough to know for sure, but I’m guessing that places like North Bay, Orillia, maybe even Kincardine would have a hospital.

  13. So Fidelity was kind enough to e-mail me the report that CC mentions. The only thing that struck me is that they based their recommendation on the assumption that “post-retirement consumption” (income minus taxes) would be the same as “pre-retirement consumption” (income minus taxes, CPP/EI contributions, and savings).

    I don’t think this is a fair assumption, unless you narrow the timeframe for “pre-retirement consumption” to the 5 years immediately preceding retirement. If you’re in your 50s or 60s, you probably have your car and house paid for (or nearly so) and you probably don’t have many other debts.

    Right before retirement, your “consumption” level is likely less than it would be when you are in your 20s, 30s, and 40s, when you’re paying for child care, the mortgage, car payments, and so on. Ideally a large portion of your income at that stage in life is going toward retirement savings.

    Accordingly, I think it’s difficult to look at generic “income replacement” percentages and apply them to an individual scenario. It’s best to figure out exactly what your expenses are right now, subtract the expenses that will be eliminated in retirement, and add in any planned retirement expenses (i.e. travel). Only by doing this exercise can somebody figure out what their “true” income replacement goal should be.

  14. People should also read Malcom Hamilton, chief actuary
    with Mercer Human Resources Consulting Canada, member of the CPP investment board and a much published actuary.
    Mr Hamilton spears the the retirement income estimates of financial companies he claims are self-serving. He says we generally need much less income than the companies tell us.
    If you are going to read the arguments of the retirement investment industryyou should also read his analyssis for balance.
    He has had artcles on the subject of retirement income published in magazines like Monerysense. You can probably find some of his articles on this and other financial matters by googling him.

  15. For me personally, I maximize my RSP every year just because I want that tax relief right now! Then I invest that RSP money (in a self-directed account) to the best of my ability.

    But beyond that, I sort of “let the chips fall where they may”, as I have not defined any sort of a “target” where that portfolio needs to be when I retire. I just make sure that I maintain a fairly balanced portfolio of selected stocks and bonds and a couple of mutual funds for some diversity.

  16. Canadian Capitalist

    George: Good point and that’s exactly what StatsCan’s data suggests as I discuss in the next post.

    ML: I am aware of the debate over retirement spending and I’ve mentioned the other side of the debate many times, specifically David Trahair’s “Smoke and Mirrors”. Many studies have demonstrated that retirement expenses are lower, but it is unclear if it is due to lower income or lifestyle changes. Hence, the debate rages…

  17. I have been retired , early, for four years now and I would say it is definately lifestyle changes. My experience has been closer to what Hamilton and Trahair envision than what the ads of the financial services try to get us to believe.
    Why I read all kinds of blogs and websites on financial matters and retirement is –because I have more time to do what I want–and the management of assets does not stop when one retires. I still have a RRSP portfolio that I will not convert to a RRIF/annuity for several years.
    Just having time to research and think without deadlines and the pressure of employment changes ones spending. What I am getting at is that I have much more time to look for the best deal for the stuff I normally buy. I did not always have time to do this when employed. Lastly, my stress level has gone way down since I retired and one of the big benefits was that I was able to quit smoking. It really is easier to do so when you are in a low stress enviroment. This lifestyle change alone resulted in a drop in spending of after tax dollars.
    Finally, as you get older you tend not to be interested in accumulating things and spend less doing so. Of course, some people are exceptions to this rule.

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