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.