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.
Very good post Bruce and I fully agree with your comments.
I'd like to add a couple of points.
I have clients who don't max out their RRSP's every year and never will. These people usually own property and have other non registered resources such that they will do fine in their retirement. This never seems to get mentioned in the scheme of things. It really doesn't matter how much you have in RRSP's per se, in general, what ultimately matters is that you have the financial resources to equate to roughly the disposable income you've had or had most of your life. If you can accumulate this outside of your RRSP you actually require less resources. This can be applicable to those who are accumulating wealth by means other than T4 income.
Strangly enough I have one client who called today and I told not to put money in his RRSP because he's way beyond the point of having a secure retirement and he should be focusing more on enjoying his current years and watching his cashflow. This particular individual owns 6 houses worth about 5M (less 2M in mortgages), has no children and a defined pension plan. In his case he's better off avoiding debt, especially non deductible debt.