Planning for Retirement

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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CROCKD
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Re: Planning for Retirement

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Most retired Canadians are loving it - but worry the money won’t last
Given their current income and cash flow, 54 per cent of the respondents said having to deal with a new $500 monthly payment would be unmanageable.

Of those, 34 per cent said it would be very unmanageable and 19 per cent said it would be somewhat unmanageable.
i.e. More than half say they would have trouble finding an extra $6000 a year.
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Re: Planning for Retirement

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Obviously one size does not fit all and probably shouldn't even be expressed as a percentage of pre retirement earnings. I suspect that most people would spend a little more if they suddenly realized they could afford it. The frugal would probably not. I think for most the amount of retirement spending is iterative and changes as circumstances change. I know it did for us. Having said that and realizi g that we had more income in retirement than we thought, we simply spent more. Has worked out to maybe 20-30% more than before retirement because we could. Understand that most people wouldn't be in this position.
Have been retired for over 6 years now and it is interesting how our spending has been re allocated. Less on travel and more on property maintenance as we bought vacation properties. i expect it will change more as we age (currently I am 62)
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AltaRed
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Re: Planning for Retirement

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Pretty much a similar story here. Retired almost 7 yrs, currently 63. I have upped spending because I can and who knows when I will no longer want to, or am able to do so. That said, I know many people who HAVE to watch their spending and will remain highly dependent on CPP and OAS, and perhaps in some cases GIS.

I see that as a miserable way to spend 20 years or so without doing something about it. I'd think these folks would do well by having a 10-15hr/wk job while, or if, they have the health to do so. That extra $100-200/wk could do much to decrease the consequences of running on an empty tank in later life.
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Re: Planning for Retirement

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i went back and read more posts on this thread. Seems like much of the debate revolves around where people spend, or don't spend, their money. i think this issue is easier to understand if people analyse where their spending is both prior to retirement and projected into retirement. Most (i think) retirees spend their money differently in retirement as compared to when they worked. Understanding this is a challenge before the fact. Having a good handle on where you spend and want to spend is key.
As I posted recently, we spend 20-30% more in retirement (excluding lumpy real estate purchases) than in the last few years of working. This is a generous lifestyle by any measure but only represents dividends and pensions received. Could we spend more? You bet. Do we need to? No way.
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Living-Standard Replacement Ratio, or LSRR

Post by Peculiar_Investor »

Rob Carrick has an article yesterday/today The new way to tell if you’ve saved enough for retirement - The Globe and Mail that caught my attention.
Rob Carrick wrote:The standard measure of how well-prepared people are for retirement is very close to useless.

This gauge is called the replacement ratio. You’re supposed to save enough money to generate annual income of about 70 per cent of what you grossed in your peak working years. Some experts say 50 per cent will do, while others think 80 per cent to 100 per cent is a better target.

We can now stop arguing about what percentage is right and focus on a new way to judge retirement readiness. It’s called the living-standard replacement ratio, or LSRR. Think of it as a personalized way to measure how your lifestyle in retirement will differ from your working years.

The LSRR was developed by actuary Bonnie-Jeanne MacDonald, an academic researcher at Dalhousie University in Halifax. Her starting point was a recognition of the flaws in the widely used replacement ratio. She found that while some people in the financial industry were aware of this to varying extents, they felt trapped into using the ratio by virtue of its universal acceptance and a lack of alternatives. “There has never been a single study that actually shows the replacement rate does what it’s supposed to show,” she said.
IIRC there have been a number of topics discussing whether the "traditional replacement ratio" of 70% is appropriate or if not, what should it be.

Google has helped me find what I believe to be Bonnie-Jeanne MacDonald's paper on the matter, Moving Beyond the Limitations of Traditional Replacement Rates | SOA
Rob Carrick wrote:What they found was next to no connection between the replacement rate achieved by a retiree and their standard of living. “The living standards of people who retired at 70 per cent could go way up, they could go way down,” Dr. MacDonald said. “We saw nothing systematic.”

The LSRR attempts to do much the same thing as the replacement ratio, which is provide a guideline on how much you need to save to live in comfort. But it’s more accurate and personalized because it looks not just at your income, but also your savings, home ownership and the number of people you support (kids, parents).
I would concur that a simple 70% ratio isn't very helpful except perhaps as a very general rule-of-thumb or starting point for those that want a quick and dirty calculation. As has been mentioned here and in Carrick's article, looking beyond income at savings/home ownership and other factors makes a lot of sense to me.

I would be interested to hear if Bruce and/or Flights of Fancy have read/reviewed this material and can offer any viewpoints on it. Anyone else have a viewpoint on the merits of the LSRR approach?
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izzy
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Re: Planning for Retirement

Post by izzy »

I think that what is needed for most of us is a reasonable rule of thumb for a MAXIMUM income to aim for and I think CRA provides that in the OAS clawback level ($73756 in 2016).After income tax that leaves over $50,000 to live on.Double that for a couple and it should be more than enough,even in the most luxurious nursing home. :?
Last edited by izzy on 06 Feb 2017 12:42, edited 1 time in total.
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ghariton
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Re: Planning for Retirement

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Well yes, obviously 70% is just a rule of thumb. Clearly a one-size-fits all "solution" will likely end up fitting nobody.

ISTM that what is needed is drawing up a future budget for one's retirement years. Yes, there will be many assumptions, and some outright guesses. But at least you will be looking in the right place. As well, this allows you to play what-if scenarios, and to build in margins of safety tailored to you and your risk aversion.

I don't think a single number, like 70%, should even be a starting point. Using it as a starting point could bias the rest of the exercise.

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izzy
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Re: Planning for Retirement

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If you want to get to the top of the mountain perhaps you should aim for the sky?
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Re: Planning for Retirement

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"Those that made a significant investment might set their target at 50 per cent of final average earnings.

Households that made moderate investments (e.g. less expensive house, fewer children) might choose 60 per cent as their target.

Finally, individuals who made no such investments will probably want 70 per cent."
Is this new 50/60/70 target perfect? Of course not. There are many factors that can raise or lower these percentages somewhat — factors such as income, marital status, inheritances, retirement age or whether you belong to a workplace pension plan. Nevertheless, a 50/60/70 rule is significantly more accurate than the current rule of thumb.
http://business.financialpost.com/perso ... ome-target
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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ghariton
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Re: Planning for Retirement

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izzy wrote:If you want to get to the top of the mountain perhaps you should aim for the sky?
Overreaching can lead to accidents. True for mountain-climbing. True for investing as well. For example, if you grossly overestimate your monetary needs in retirement, you may be led to over-invest in high-risk high-return assets.

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Re: Planning for Retirement

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Sigh.
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Re: Living-Standard Replacement Ratio, or LSRR

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Peculiar_Investor wrote: I would be interested to hear if Bruce and/or Flights of Fancy have read/reviewed this material and can offer any viewpoints on it. Anyone else have a viewpoint on the merits of the LSRR approach?
I tried to read the linked paper. It's very academic and incredibly boring so I wound up scrolling and scanning a lot. I think the authors have made the case that:
-- It's impossible to create a one-size-fits-all income replacement ratio (IRR)
-- Past attempts to do this with any precision failed because there are so many potential factors to consider and little or no agreement as to their importance
-- It makes more sense to base the IRR calculation on pre-retirement consumption as opposed to pre-retirement earnings. I think that makes sense but doubt its practicality on grounds that, I suspect, most people don't keep such data

The authors then use a Statistic Canada database to calculate IRRs for three income groups. It looks like 60% would work for most middle-class people. That's very similar to the non-academic research done 25-30 years ago by actuary Malcolm Hamilton. Hamilton used StatCan's survey of household expenditures to see how much retirees spent and correlated that with a StatCan survey of retiree life satisfaction. He found that typical middle-class retirees were living quite happily at IRRs of 50% to 60%.

One important point that Hamilton made and I think the study authors did too: When choosing an IRR you have to consider the degree to which your retirement lifestyle should reflect your average lifestyle or the lifestyle of those years just before retirement. With mortgages paid off, more or less, and kids on their own, more or less, many people experience a substantial increase in disposable income for their last few years of work. Delving into his StatCan data Hamilton found that happy retirees tended to lead their average adult lifestyles, more or less, rather than the Freedom 55 stereotype.

Another important point: IRR determinations typically use a straight line but actual retiree spending doesn't. The profile has been compared to a smile: up in the early years, then down and then up again as advanced age requires expensive medical treatment and care. That's based on US analysis so the Canadian smile is probably more lopsided. In any event, a Canadian financial planner provided the best summary I've encountered. He said there are three phases to retirement for most people: go-go, go-slow and no-go.

BTW, when I wrote The Pension Puzzle I constructed a model case for a very ordinary Canadian living in BC. I think her income level was $60,000. I found that the biggest factors for why she was able to maintain her lifestyle in retirement at much less income were 1) a lot of the foregone income was lost to tax and thus not available for spending; and 2) she no longer had to save for retirement.
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Re: Planning for Retirement

Post by Peculiar_Investor »

Thanks Bruce. Your sharing of your knowledge and insights in this area is very much appreciated. :thumbsup: :thumbsup:
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Re: Living-Standard Replacement Ratio, or LSRR

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brucecohen wrote:
Peculiar_Investor wrote:
Hamilton used StatCan's survey of household expenditures to see how much retirees spent and correlated that with a StatCan survey of retiree life satisfaction. He found that typical middle-class retirees were living quite happily at IRRs of 50% to 60%.

One important point that Hamilton made and I think the study authors did too: When choosing an IRR you have to consider the degree to which your retirement lifestyle should reflect your average lifestyle or the lifestyle of those years just before retirement. With mortgages paid off, more or less, and kids on their own, more or less, many people experience a substantial increase in disposable income for their last few years of work. Delving into his StatCan data Hamilton found that happy retirees tended to lead their average adult lifestyles, more or less, rather than the Freedom 55 stereotype.

In any event, a Canadian financial planner provided the best summary I've encountered. He said there are three phases to retirement for most people: go-go, go-slow and no-go.

BTW, when I wrote The Pension Puzzle I constructed a model case for a very ordinary Canadian living in BC. I think her income level was $60,000. I found that the biggest factors for why she was able to maintain her lifestyle in retirement at much less income were 1) a lot of the foregone income was lost to tax and thus not available for spending; and 2) she no longer had to save for retirement.
When I constructed our retirement plan I started by researching what the average retiree spent using stats Canada data, and Hamilton's papers on the issue. Going off my memory the Canadian research pointed to declining requirements for funds as we age due to universal health care and Government supplemented aging support, coupled with significantly decreased spending after 80 for most.

I placed a lot of emphasis on the break down of retirement using the : go-go, go-slow, and no go case frame above, also the best I have seen for creating a functional framework for income requirements.

Finally, I broke down all our options for income, specifically when to draw which income streams, tying this all in to taxation as it will be our largest expense.

Bruce, a shout out to you, your book was quite valuable for debating the sequence of income draw at various ages. Most of the topics in the personal finance industry is on accumulation vice draw down.
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Re: Planning for Retirement

Post by newguy »

We've talked about IRR before around here.

http://www.financialwisdomforum.org/for ... 11#p553211

You can sort of see the smile Bruce talked about in the upper quintile, but I'm sure the health care coverage makes it quite lopsided.

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Re: Planning for Retirement

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I leave retirement out of the equation.

The concept "now you're working, now you're not" is a tad restrictive. What about a planned 3 year sabatical in 5 years, or taking just partial retirement, or what about when you sell the summer cabin in 10 years time, or finally pay off the mortgage?

It's a variable cash flow problem.... there are periods when more money is coming in (you save) and periods when not enough is coming in (you un-save).
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Re: Planning for Retirement

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steves wrote:I leave retirement out of the equation.

The concept "now you're working, now you're not" is a tad restrictive. What about a planned 3 year sabatical in 5 years, or taking just partial retirement, or what about when you sell the summer cabin in 10 years time, or finally pay off the mortgage?

It's a variable cash flow problem.... there are periods when more money is coming in (you save) and periods when not enough is coming in (you un-save).
My view, at some point in mid life, getting a grip on your actual funding requirements in retirement is the basis for living to your potential. We are not living for retirement, but made a plan, so we can spend our excess funds now. We travel now, enjoy life now, knowing our retirement funds are off the top after our bills. We happily spend the rest. We created an income smoothing formula that will allow us to continue our lifestyle after paid work.
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