The 75 percent standard is a pretty basic goal for retirement planning. You might even feel you need more money to live. But ask yourself this: Could you live on half or less of what you're making today?
Jo Anne wrote:Well, our annual income went from around $120K to $35K after we retired
Also I suspect that there's a disconnect between wants and needs. Everyone wants to retire with 100% of their former income, but they don't necessarily need to.Friendly Dragon wrote:Could you live on half or less of what you are making today?
Would you (a) retire now, adjusting your lifestyle to the lower income (e.g. by moving to a smaller, less expensive community) or (b) continue to work to age 65?"
BruceCohen wrote:The 75 percent standard is a pretty basic goal for retirement planning.
My eyebrows shot up when I read that. The "standard" here in Canada is 70% and it's only a rule-of-thumb. While researching The Pension Puzzle, I tried to find out where it came from. Nobody could tell me. The best I got was that it was derived 40 or more years ago during the design of defined benefit pension plans. Most public employee DB plans, for example, are designed to replace 70% of income after 35 years.
Research by Statistics Canada and actuary Malcolm Hamilton -- using real numbers from real people -- found that most of today's retirees replaced 50-60% of income. The higher the income, the lower the replacement level.
At the start of The Pension Puzzle, we show how it was very easy for a BC woman to retire on 70% of her $50,000 income. More than half of the $15,000 she "lost" was money she never had because it was siphoned off her pay for income tax, CPP and EI. Add on the pension/RRSP contributions she no longer makes and you've covered more than two-thirds of the gap.
Malcolm Hamilton keeps making a salient point that just doesn't seem to be registering with people in general and the financial industry in particular. The typical Canadian has far more discretionary income in his/her last few years of work than over the rest of their careers when they were feeding kids and mortgages. What income level are you replacing -- the current, abnormally high one or the lower one that likely seemed OK for most of your adulthood?
That said, I often worry about the poor state in which many boomers will enter retirement, especially in the US where the income tax code perversely encourages people to pile on debt. People will muddle through -- they always do -- but they and the economy will be in for gigantic change. That's why, when I developed the Pension Puzzle retirement calculator, I wrote code that lets people work in retirement. I wish all retirement calculators did that.
The refrain that runs through many of our heads during our working lives goes something like this: "I'll work really hard now, putting in such long hours that there's no time to pursue other interests or take really good care of myself, because at some point I'll retire completely and not have to work at all anymore. Man, won't that be great—whenever it finally happens." But, according to Steve Vernon, an actuary at human-resources consulting giant Watson Wyatt (www.watsonwyatt.com) who has spent 30 years helping companies and executives design retirement plans, that old all-or-nothing approach to work and retirement is unrealistic. Instead, he says, longer life expectancies and greater financial uncertainty will lead most of us to work at least part time after we retire, so the key to a happy old age is to start thinking and acting differently right now. ...
"I'll work really hard now, putting in such long hours that there's no time to pursue other interests or take really good care of myself, because at some point I'll retire completely and not have to work at all anymore.
It makes me wonder how far from retirement these people are themselves.
treetops wrote:Only lifestyle adjustment has been (much) fewer restaurant lunches and dinners
Vexman wrote:You can retire with far less than 70% of post-retirement income but only if you are not carrying significant amounts of debt into retirement. Unfortunately for them, many boomers are not paying off their debt fast enough and some - don't ask me why - are actually taking on new debt despite the fact that their likely working years are coming to an end.
One more point about the 70% number...
You can live on far less than 70% if you want to maintain a similar or lower fare lifestyle. The problem is if you actually want to use your golden years to do all of the things that you could not do while you were working (e.g. long multi-month vacations to exotic destinations). If this is what you want, you need to plan on saving more.
I know for myself not only were we living on less than 35% of our gross income but as well we were paying $15,000 - $20,000 a year in expenses that just disapeared when we moved into semi-retirement.
AltaRed wrote:That is a substantial drop in expenses. I cannot imagine where all that would come from. I am not sure spouse and I could see more than $5000 or so change in expenses and we've been doing some estimating of the change when we retire in the next year. Care to share somewhat where that $15-20k was?
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