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Research on Financial Circumstances of Retirees

May 28th, 2007 · 9 Comments

I would like to express many thanks to reader George for pointing out an excellent research article by Malcolm Hamilton. The report, titled The Financial Circumstances of Elderly Canadians and the Implications for the Design of Canada’s Retirement System, delves into data from StatsCan’s Survey of Household spending and compares income and spending patterns of working-age and retired Canadians.

The report finds that while prime age Canadians do have a larger income, most of their income goes toward taxes, mortgage, savings and providing for young children. In retirement, most of these expenses are greatly reduced and the amount available for consumption (which reflects the standard of living) is not much less than for prime age Canadians. For instance, senior couples, on average, earn slightly more than half that of prime age couples, but the amount available for consumption is only 14% less. In fact, the surprising finding of the report is that seniors are saving and gifting a full 16% of their gross incomes. It is hard to argue that consumption of seniors is reduced out of necessity when they save a significant portion of their incomes at a late stage in life.

The report concludes:

Much of Canada’s retirement system, both public and private, has been built on a faulty assumption — that seniors need to replace 70 per cent of their employment income to maintain their standard of living. Most of the evidence suggests that the required ratio is 30 per cent to 70 per cent depending on an individual’s circumstances, with the average closer to 50 per cent than 70 per cent. The fact that today’s seniors have roughly half of the income of prime age families, but can afford a similar standard of living, supports this conclusion.

The news is also encouraging for those who want to retire early:

Those who save heavily, either because they participate in expensive pension plans (as are common in the public sector) or because they adhere to a strict savings regime, will typically find that they can retire in their 50s and live comfortably on 50 per cent of their employment income. If they keep working until they achieve the conventional 70 per cent target, they may have trouble spending their retirement income, particularly as they push into their late 70s. The recent experience of public sector plans suggests that many Canadians are prepared to retire in their 50s with pensions that are at the low end of the range that has traditionally been considered adequate.

Related: The Truth About Early Retirement from Reader’s Digest.

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9 responses so far ↓

  • 1 George // May 28, 2007 at 9:11 pm

    Thanks for the kudos, CC. Glad you liked the article. I’ve got to thank “ML” who commented on your post on “Fidelity’s Retirement Math” – ML’s comment is what led me to the article.

    I e-mailed a link to the article to the folks at Fidelity and asked for their comments, just to see what kind of response they would have. I’ll post a comment once I’ve heard back from them.

  • 2 FourPillars // May 28, 2007 at 11:02 pm

    Interesting post on the article.

    I’ve done some cost-based estimating on what I need to retire and it works out to about 45% of current income, which is more than what I’m living off of now if you don’t count “younger” costs like mortgages etc.

    George – I got a laugh out of your emailing the report to Fidelity. They might have to completely redo their marketing.

  • 3 outroupistache // May 29, 2007 at 6:04 am

    Very useful reference article, thanks to George and CC both.

  • 4 ML // Jun 4, 2007 at 9:19 am

    Thanks George

    Malcolm hamilton has long ben a favorite of mine, The firm he was/is with Mercer Human Resources Consulting was employed by my ex-employer to give us HR and retirement advice.
    I retired at 58 and found his calculations to be largely correct.

    ML
    Ottawa

  • 5 George // Jun 6, 2007 at 12:05 am

    FourPillars: The response from Fidelity was basically that they made the assumption that any net income not put toward retirement savings was spent and therefore part of “consumption”. I don’t think that’s a fair assumption, and it definitely doesn’t apply to people who live below their means – it seems to apply only to people that spend almost every dollar that they earn.

    ML: The thing that struck me was that Hamilton’s paper was based on the facts of people already retired, rather than speculation. The Fidelity report seemed based on assumptions and speculation rather than facts.

    Of course, one problem with looking at “retirement” is that views of it change greatly from generation to generation. A lot of retired people right now lived through the depression in the 30s, which means that they may simply be extremely frugal by nature. It’ll be interesting to see if similar research is done within the next 10-20 years looking at Boomers in retirement, to see if the trends continue.

    For me, I’ll just aim to maximize my savings and my actual consumption needs, and focus on making my “I can retire now if I want to” date sooner rather than later.

  • 6 FourPillars // Jun 6, 2007 at 7:52 am

    George, that is a ridiculous assumption. I spend $1500/month on my mortgage…and I will need that $1500 for spending when I’m retired?

    I’ll take the $1500 if it’s there but I definitely don’t need it.

  • 7 Are Canadians Saving Enough For Retirement? // Jun 15, 2007 at 3:03 pm

    [...] vigorously disagreed when the financial industry suggested it to be a million dollars or more, even the lowest estimates run to at least a few hundred thousand dollars plus a fully paid-off [...]

  • 8 Are Canadians Saving Enough For Retirement? Part 2 // Jun 15, 2007 at 11:27 pm

    [...] to actuary Malcolm Hamilton (who based his conclusions based on a 1997 survey), the median retired senior couple needs $24,700 [...]

  • 9 Fidelity’s ‘Scary’ Retirement Findings // Oct 24, 2007 at 8:01 pm

    [...] 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%. [...]

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