I am currently reading David Trahair’s Smoke and Mirrors and instead of writing a book review, I want to comment on what the author calls “the big myths of financial planning”. There are five myths mentioned in the book and we’ll explore the first in this post and the rest in future posts.

Myth # 1: If I had a $1,000,000 … I could retire

Mr. Trahair argues that most people will only need a fraction of a million dollars to retire and that the financial services industry has a vested self-interest in telling people they need more. Also, he shows how a typical family only needs about 40% of their pre-retirement income, not 70% that conventional financial planning says you will need. If government programs like CPP and OAS were taken into account, most people would only need a nest egg of a fraction of million dollars to retire.

Mr. Trahair is not alone in calling the 70% figure a myth. Recent academic studies in the U.S. have shown that online retirement calculators overestimate retirement needs by 36% to as much as 78%. In my own case, even with a young family, we don’t spend anywhere near 70% of our incomes in our working years and I don’t see how we will spend that much in retirement. The fact that most people don’t know exactly how much they are spending makes it easy for the financial industry to convince us that we need 70% or more of our pre-retirement incomes.

The argument that most people aiming for a traditional retirement do not need a million dollars is convincing. Of course, those planning an early retirement need a larger nest egg, as they cannot count on OAS until they are 65 and reduced CPP benefits until they are 60.

Continue to Part 2…

This article has 19 comments

  1. CC,

    Too true. I think a lot of people get caught up in that myth and don’t look at their own numbers to see what they need.

    Did you like the book so far? I found it ok, but lacking any depth on the issues he discusses.


  2. I have never accepted the 70% rule as being of general application – different people will have different spending needs (and wants) in retirement.

    I have always struggled with setting round numbers as a financial goal. They tend to distract from the determination of what is really needed. For some people, $1 million is more than enough. For others it is not enough.

  3. Setting up a retirement value based on a percentage of current income is folly – whether you use 40%, 70% or anything else. You need to look at what you expect your yearly expenses to be (in inflation-adjusted dollars based on your retirement date), then figure out how long you plan on living. Calculating the appropriate figure from there is relatively easy if you know what you’re doing. I wish more online calculators did this type of budgeting style rather than basing it on current income.

  4. This book was among the first pf books I ever read – I really enjoyed it and would definitely recommend it.
    Keep in mind this book first came out a few years ago so it was probably more ground-breaking then. It seems like the last few years have seen a lot of pf books coming out – at least of few probably owe a bit to Smoke & Mirrors – although I’m sure there were many similar books before Trahair’s.

  5. I agree with the author 100%. However, I’m pretty conservative and psychologically I want to have a cushion in case something in my plan goes wrong. So although 70% of my income is more than I’d need I’d like to have a 10 to 20% cushion just in case…


  6. Canadian Capitalist

    CD: I liked the book because David Trahair, as Mike points out, took an opposing view to conventional wisdom when it wasn’t too popular.

    Investoid: I’ll agree that spending patterns, not income, should drive retirement planning. The problem is that most people don’t track their spending.

  7. I really think inflation is underappreciated when people try to come up with a benchmark. Ignoring CPP and OAS, which I believe are indexed, if you decide you need 40,000 to live on, even with mild inflation of 2% per year, 25 years later you need 65,624.24 to maintain the same standard of living. If your interest revenue is exactly 40,000 / year, then your principal is not keeping up with inflation.

    That said, it should be fairly easy to adjust for it, if you’re assuming a 6% return, of which 2% is inflation and 4% real return, then just make sure your 40,000 is covered by the 4% (which takes us back to that magic million figure).

  8. Canadian Capitalist

    Steve: Current financial planning wisdom holds that a 4% withdrawal rate in the first year of retirement and indexed to inflation thereafter offers a high probability of not running out of money. Note that it is assumed that capital will be depleted.

    The argument in Smoke and Mirrors is that OAS and CPP should not be ignored. For people fifty or older, this is probably true but can the same be said for younger people? The more years you have for retirement that harder it is to say for sure.

  9. Ah, good point CC, I’m doing my planning based on having no capital depletion at all, at least on a normal basis. Once the doctor says I have

  10. Ok, symbols bad… it was supposed to read:

    Ah, good point CC, I’m doing my planning based on having no capital depletion at all, at least on a normal basis. Once the doctor says I have less than one year to live I’ll blow it all on beer and women ! 🙂

  11. See Murphy’s Law. The only way to guarantee that you live past 100 yrs of age is to NOT save a dime for retirement. People who save millions will die at 64.5 yrs of age. I figure I’ll just try to be somewhere in between.

  12. Steve, why are you planning on no depletions? Won’t that mean a significant increase in the amount of $$ you’ll need to retire?

  13. There are two main reasons. The first is that I am making a pretty good salary and I am pretty young. Assuming a total return on investments of 6% (which I hope I’m lowballing), then when my mortgage is fully paid, by simply continuing those payments except putting them into savings, I will have an approximate principal base of 1.6 million (not counting my home, tax refunds or inheritences) by the time I am 65. Those payments are only 28.5% of our current gross income (which will presumably raise a lot over the next 30+ years), so it’s not like it’s cramping our lifestyle, and between $96,000 interest + OAS + CPP, I anticipate our principal growing faster than inflation, which works out fine for me because the second reason is that I have a dream for my family.

    I would like to set up the “Heath Bank” for family members, so that whenever one of my children, grandchildren, nieces, nephews… whatever, starts off life they don’t have to do it burdened with debt. Whether it is for tuition, their first car, their house, wedding, any big expense… I want the funds to be there so that they are loaned the money at 0% interest, repayable as they can. It may not last beyond the generation after me if they’re a bunch of wastrels, but hey, that’s why they call it a dream 🙂

  14. Sounds great Steve.

    I was going to suggest that you can probably retire earlier than 65 but you probably already know that!

  15. Yeah, but I’m lazy enough as it is, if I didn’t have to get up to go to work I’d never get out of bed 🙂

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