There is a long-standing debate in financial planning circles about what percentage of their income Canadians need in order to have a comfortable standard of living in retirement. I've heard recommendations that run all the way from 40% up to 70% of what you earned before you left the workforce.
Is it useful to think about retirement planning in these terms? Maybe less than we thought.
Cindy Crean, Assistant Vice-President, Private Client at Sun Life Global Investments (Canada) Inc. and a certified financial planner, says the standard percentage recommendations are too impersonal.
"Everyone's situation is so different that I don't think you can apply an estimated percentage," she says. "For example, if you're living in an expensive city like Toronto or Vancouver and you decide that what retirement looks like for you is to move to a smaller community, your expenses at retirement are going to be greatly reduced. You need to really look at what retirement means for you and what your expenses are going to be."
How much money will I need in retirement?
A couple of thoughts worth considering:
First, you will spend less in retirement than you did when you worked full-time. The 2016 Sun Life Canadian Retirement Now Report – a study of both workers and retirees – found that on average retired Canadians are living on 62% of what they earned before leaving the workforce.
Working Canadians reported spending an average $3,431 each month on regular expenses such as food, housing, health care, income tax, leisure/travel, entertainment, transportation and savings. By comparison, the average retiree spends just $2,611.
Does that trouble them? Hardly. Almost 9 in 10 (88%) told us they feel positively about their life in retirement.
"You don't have the cost of commuting to work, the cost of buying lunch, the cost of updating your wardrobe," says Crean. "There are a lot of expenses that will start to go away."
Second, despite these savings, retirees spend differently as they grow older. When planning for your retirement income needs, it's useful to think about your retirement in three stages.
The first stage comes immediately following work. Your health is probably good and you will have money to spend on travel and other leisure activities. Next comes a quieter stage as your energy starts to dip and you become more comfortable with a slower pace. Finally, as health issues become more prominent, you may be one of the many who can expect to pay significant sums on health care (and in some cases long-term care) as you get older.
All of this is very personal. No two retirement experiences are alike.
- Try our retirement savings calculator to see how much money you will need to retire in Canada
Building a million-dollar retirement plan
It's even less productive to think in terms of a lump-sum savings goal like $1 million or so. First, it is difficult for many Canadians to imagine ever saving that much money. Second, it glosses over the specific details of what your life in retirement is going to be like.
"You have to go that extra step and ask what that $1 million is going to do for you," says Crean. "For example, where is your guaranteed income coming from? Not all of us have the luxury of a defined-benefit pension plan that gives us an income for the rest of our lives. If you're thinking lump sum, you're not really thinking that way. You can be vulnerable to market movement or low interest rates, so $1 million may not spin off as much income as you thought it would 15 or 20 years ago."
She also recommends including your partner in the plan, if applicable. "Look at each of your sources of income at retirement and investments holistically," says Crean. "This way you can do some tax planning and plan out your after-tax income requirement as a couple."
Thinking in terms of an income-replacement percentage is not the worst problem to have, of course. It's difficult for younger Canadians to sort through all of the decisions that go into detailed retirement planning, when they have so many pressing concerns in the here and now. But even they would probably be better off thinking about what kind of retirement lifestyle they'd like to have, and then working back from there in terms of what that will cost.