The Perfect Retirement Myth

by Mike Holman

Welcome to Money Smarts! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates by email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

There is a lot of retirement angst going around.

How much money do I need to retire?  How do I manage my investments so I don’t screw up my retirement?  Can you increase CPP so I don’t have to worry about it?

Don’t worry about achieving the perfect retirement scenario

Too many people (helped by industry advertising) think of retirement planning as all-or-none.  Either they retire with a “million” (or whatever amount) and have a great retirement or they will be living in a cardboard box.

In reality, there are probably several levels of retirement income which could result in reasonable, although not always ideal retirements.  People are adaptable – Just because you aren’t rich in retirement, doesn’t mean you are poor.

There is more than one “number”

Retirement planning normally involves an iterative process where the investor or advisor figures out how much retirement income they would like and then tries to determine if they can achieve that income.  By changing various factors such as retirement age, savings rate, retirement income – eventually they come up with a number,  which represents the amount of saved money they need to retire.

There is nothing wrong with that process, but investors have to remember that there are many different retirement outcomes – not all of which are bad.

For example, a couple living on $100,000 per year (let’s assume the kids are independent) might consider the following possibilities:

All figures are gross income in today’s dollars (ie adjusted for inflation)

  • Retirement income – $30,000. This would entail scraping by and maybe working part-time.  Not ideal, but certainly doable.  This could be the result of either not saving at all or perhaps retiring very early.
  • Retirement income – $50,000. Comfortable, but not extravagant living.  In terms of savings – this path would involve working a longer and/or saving more than in the first scenario.
  • Retirement income – $75,000. Very comfortable – they will likely have more disposable income than when they were working.  This income level would imply a later retirement and/or very high saving rates.

Of course, the third option sounds great – I’d love to make $75,000 per year in retirement.  The problem is that it requires a high savings rate and likely a late retirement.  Personally I’d rather live my life, retire at a decent age and “settle” for the second option of $50,000 retirement income.

It’s all a guess

The other big factor in retirement planning, is that unless you are retiring in the very near future – any kind of retirement planning requires assumptions which are just guesses.  If you are 30 years old and wondering how much to save for retirement – you need some very general retirement planning to get a rough idea of how much to save.  Anything more detailed than that is a waste of time.

Be Sociable, Share!

Want to learn more about RESPs? Buy The Book:

Resp-Book

The RESP Book: The Simple Guide to Registered Education Savings Plans

Everything you need to know about RESPs.

See it on Amazon now

Welcome to Money Smarts! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates by email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

{ 34 comments… read them below or add one }

1 Echo

I never understood that ‘number’. There are so many moving parts and unforeseen events that could take place between now and retirement that you’re right, it’s a waste of time trying to figure it out.

I’m turning 32 this summer, we are building a house, I changed jobs 18 months ago, my wife got diagnosed with MS three years ago…life happens. In the meantime we don’t spend more than we earn and we have goals to pay down our mortgage early and max out our TFSA every year.

Will that be enough, who knows? Every year gets us closer and we can evaluate our plan and make changes along the way.

2 Mike Holman

Great comment, Robb. Way too many moving parts.

My approach to retirement planning is to try to continually improve our finances. Obviously that means spending less than we earn, saving and paying down debt.

It’s hard to quantify though – I don’t like “rules of dumb” like saving 10% (although saving 10% is not a bad thing to do).

3 Jim Yih

Thanks for the great topic!
I’ve always said the point of retirement planning is to look into the future to make the future as predictable as possible. As you an Robb point out the future is near impossible to predict. I just hope that people take time to do some planning because it gives direction. We may have to change course along the way but direction is important because any road will get you somewhere. To continuously improve requires that you know where you are. Planning is a process and not a one time occurrence.

4 Mike Holman

Good point Jim.

I certainly don’t want to give the impression that all planning is a waste of time.

5 financial advisor

planning is a good reality check. Think about having a messy desk – you don’t know what’s what and where it is. Disorganization is very messy and in fact counter productive because it makes it harder for you to do your job. Now if someone helps clean that desk up for you, you will have a much higher chance of knowing where you stand, where things are, and you can concentrate more on enjoying your life.

6 Mike Holman

@Financial Advisor – If someone else cleans my desk, then I won’t know where anything is.

7 Cathy

Thanks for the article as I’m within 5 years of retirement. However, when writing about incomes, I’d appreciate if you could specify if they are gross or net.

Thanks.

8 Mike Holman

@Cathy – The incomes in the example were gross. It shouldn’t matter a whole lot in this example, but thanks for pointing it out for future articles.

9 Cathy

I would be great if you could do an article on how much singles need in retirement. So little is written on this topic yet more and more people are finding themselves alone. Not having the benefit of 2 CPPs, 2 OAPs, 2 RSPS/Pensions and income splitting makes a big difference in the amount singles need to have a comfortable retirements. I’d love to see bloggers such as yourself tackle this issue as well as strategies to minimize the income tax that singles need to pay.

10 Mike Holman

@Cathy – good suggestion.

Obviously, if one is single going into retirement, they would just plan for that. The problem is that if you plan for 2 incomes (CPP, OAS etc) and one person dies, then that might really screw things up.

I’ll have to think about that scenario a bit.

11 Cathy

You’re so right about changes that may occur when one spouse dies. Rarely do articles address how finances may be reduced due to an increase in income tax to be paid and reduced CPP & OAS etc.

I don’t agree though that it’s easy for singles to create a plan for retirement. I believe that it’s harder to accumulate enough funds. Basic expenses are higher because there is only one retirement income to pay them instead of two. Plus only one income contributed to the savings. To top it off , a single person pays considerably more in income tax than a couple with the same income. It’s my belief that singles need to save more than couples to enjoy the same standard of living. But by how much? There isn’t much written about this dilemma.

12 larry macdonald

I read something recently that seemed to make sense in this context. The writer said that they are trying to save as much as possible for retirement without targeting a specific number or depriving themselves of a comfortable living standard. When retirement comes, they will then find a way to live within the limits of whatever is saved up.

13 Mike Holman

@Larry – For someone who has a decent savings rate already, that’s probably a good strategy.

14 Rob

What we need/want/have for retirement is felt to be enough if it is equal to what we have lived on all along. So understanding your cost of life and commitments (future cars etc) will help in the transition. Picking an income in the future and not understanding the standard of living you are enjoying now is the trap. The trap gets bigger when we let the cost of living go up every year by letting raises and bonuses disappear in our life flow.
Iif you have been living on 50K a year, going down to 30 is a big drop. If you have been living on 75K and go down to 50, that’s even bigger.
How do you use Math to attract more cash flow into your life is the key.

15 BeatingTheIndex

I will settle for the second number as well, 50k a year is great for retiring and it is attainable in theory without having to go hungry now and work 10 years extra. People are getting carried away with all the advertisement on TV…

16 JP

Geez, I will be turning 30 this year and retirement planning isn’t even on my radar! I will have to come back to read your retirement posts in 5 years or so as I am currently putting my money to debt repayment and my online store. Will starting a retirement fund at 35 allow for freedom 55?

17 youngandthrifty

$50,000 a year would be a very comfortable retirement (especially if everything is paid off). I agree that retirement planning is always fluid, never static. The future is unpredictable, you never know if your children become boomerang kids and stay with you (worst case scenario, I suppose!), or if you continue to work once a week.

I do agree that the retirement ads on TV are very misleading.

18 My Own Advisor

Good post, there is no “magic number” unlike the banks, financial institutions or others-who-have-their-hand-in-your-pocket suggest.

I like your approach to retirement planning, to try to continually improve your finances. I feel, I hope, we are doing the same thing:

-paying down mortgage
-building an emergency fund
-optimizing our RRSPs
-will maximize our TFSAs over time
-letting our pensions build.

A little bit of everything. Whether that’s the perfect strategy or not, I don’t know, but the process feels right to us.

I agree with Y&T, $50,000 a year would be a very comfortable retirement if you have no debt whatsoever. Ah, what a nice thought, no debt :)

Cheers,
Mark

19 Eclectic Investor

Ah, yes … the proverbial “magic number” is interesting.

I can remember making $23K a year, having a middle of the road defined benefit pension yet the bank retirement calculator was saying that I *might* scrap by if I saved agressively to end up with $8 million at retirement in addition the db/gov’t pensions. Hmmm….

@ Cathy: Yes, it can be tough in some respects as a single.

But then again, there are several areas where it helps. For instance, if I make a decision to save, I don’t have to worry about unexpected bills or plans from the wife/kids. Then too – there’s less stress if I change careers, reduce expenses, increase savings or whatever – one decision and one person affected.

As for two retirment incomes to help with basic expenses – that may or may not be a factor. Like a lot of other things, YMMV quite dramatically. Case in point, with my mom, after the gov’t pensions, her retirment income is something like $50 per month. My sister on the other hand is likely to have gov’t pensions plus almost the same pension as her husband.

I agree that there could be more articles.

BTW – once there are assets to obtain a cheap borrowing rate, a leveraged investment plan is worthwhile and easier to implement as a single (several co-workers like the idea/benefits but won’t implement it due to the risk tolerance of their spouse).

Cheers

20 DIY Investor

I agree that the “magic number” idea is a bit misleading but the fact of the matter is that most of us are going to be “unemployed” for 20 – 30 years. We will need to get a paycheck from a nest egg. This is something that is worth thinking hard about. A good financial plan will tell you how much you need to have to generate $50,000/year under different conditions etc. Granted there are a number of unknowns: inflation, how long we live, and especially markets. A good plan runs a number of scenarios and will arrive at a probability of achieving a successful retirement. It is , I believe worth thinking hard about. But don’t take my word for it – talk to some of today’s retirees!

21 Laura Thomas

Mike – I like your headline. It makes me wonder how exactly the magical million-dollar mark came to be part of the retirement planning lexicon in Canada. Advertising narratives and financial advisor-speak, can freeze otherwise sane people into inaction when it comes to saving for retirement.

22 One New Voice

I agree about the number. How crazy is it to think that if you put your money in the market and planned for a number to retire on and withdraw that the market wont crash again? It is crazy to me.

23 Joan

The other thing to remember is that as you go into your declining years, I’m talking 75 yrs and up, oftentimes you become less active, travel less, and basically require less income.

24 Roy Gates

I am 54 tartegting reirement at 60-62. My wife is 50 and hasnt worked in 25 years. I have currently $600 K in RRSP I will max out TFSA so I should have another $100 K for spouse and I when I retire. I have a home paid for and a cottage I can retire in for 8 months out of the year which I just bought. It wil be paid for when I retire.
When I retire I am considering renting my primary home for income or selling and holding the mortgage. Is holding the mortgage a better idea than renting? My thought on renting is that I can move back into my primary home after the cottage and snow bird stuff wear off, and then sell or rent the cottage for some continuous income. Any opinions would be valued as when I speak to my advisor he looks at me like a deer in the headlights.

25 Eclectic Investor

@ One New Voice:

Re: How crazy is it to think that if you put your money in the market and planned for a number to retire on and withdraw that the market wont crash again?

*shrug* – That’s why as you get closer to retirement, less should be in investments that can/will drop that dramatically.

Then again, if Mar 2009 was when more was put it, it’s harder to lose when the investment has been paying dividends and has to drop by 100% before it becomes a loss. *grin*

Cheers

26 cannon_fodder

Instead of a magic number of asset size, I first look at current expenses and then adjust, as best I can, what I expect that will look like in retirement.

Now, I know what my net income needs to be. I add 15% as a safety buffer. I estimate payments from CPP (taking it at 60 but accounting for early retirement and the loss of CPP contributions) and OAS.

Then I use a tax calculator iteratively to figure out what my gross income would need to be based on the type of income I expect to receive (dividends, interest, capital gains, TFSA vs. RRSP/RRIF, government payments, etc.).

For me, I then multiply that amount by 30 – this represents a portfolio size that, with a dividend yield of 4.5% will be able to fund my retirement expenses comfortably with a good degree of stability without having to touch the underlying capital and have additional income to reinvest.

Through the crash of 2009, some of my holdings did cut (or even suspend) dividends. It was a good lesson on how income can be impacted even with blue chip dividend payers with consistent payouts. But, as long as I have put sufficient buffer into my projections any shortfall should be handled by reducing discretionary expenses.

As it stands right now, projections are not guarantees. My 11 year plan has already been exceeded in the first 2 years. That is primarily a result of: aggressively investing during the lows of 2008 and 2009; not selling at the bottom; and identifying a specific seasonal investment which has furnished great absolute returns for me. However, six months in things looked bleak and I felt that I had pushed our retirement plans back by 5 years!

Thus, the idea of living a frugal, yet fulfilling, life and save as much as you can is one I endorse wholeheartedly. Don’t stop just because you’ve “hit” the magic number – the more distance you put between what you have and what you need the more opportunities you’ll possess to help yourself and others enjoy the last phase of your life.

27 Mike Holman

@Cannon_fodder – What a great comment. You sound like your finances are in great shape.

28 DIY Investor

@ cannon fodder Can I ask what the seasonal investment is?

29 Mike Holman
30 Eclectic Investor

@ Mike:

Re: A seasonal investment with good return might be pumpkin futures.

*grin*

Darn – I was hoping for that it was the tulip bulb bubble making a comeback!
http://en.wikipedia.org/wiki/Tulip_mania

31 Eclectic Investor

@ Joan:

Re: Another factor that will reduce the need for income is less activity, less travel etc. when one is older (say 75 years).

True … but then again, at that point more income might be needed to supply transportation to doctor offices, pay for medicines or medical appliances, to provide meals etc. etc.

I’m not volunteering for it but the ultimate step to reduce income needs is to die.
*grin*

All other options are complicated where none of my retired relatives have been in the same situation.

Cheers

32 Kevin@OutOfYourRut

Great post Mike. Too much of the standard advice on retirement planning is way too specific, and reduces it to a mathematical equation. How wonderful it would be if it were that simple.

A loose plan is best–there are too many variables that can’t be imagined especially early in life. You could be working and planning for retirement in a high cost area, but end up in a low cost area for reasons you never could have imagined. Or the opposite could happen, and your plans would prove inadequate.

A credible plan is important, but flexibility and a realistic attitude are at least equally so.

33 Mike Holman

@Kevin – Thanks a lot!

You’re right – a mathematical equation would be much simpler than reality. Excellent point.

34 MathBug

Just want to remind all those fanatical savers that sometimes life’s changes include early death. One of my best friends died at the age of 30 in a freak accident at the seashore. Several years earlier, after starting her first job out of university and with student loans to pay off, she had asked me, “Should I, as a 20 something, aggressively invest in my RRSP?” I knew that it would mean having very little “fun” like buying clothes or taking any trips if she did this. I told her I thought she should balance fun with investment and do a little of each. That’s what she did and I am so happy I didn’t tell her to save save save now to enjoy life in her 60′s – she never made it.

Do not give up on living life now and giving your kids some things as they grow up (like skiing and tennis and family vacations) just so that you will have a large nestegg in your 60′s.

My parents thought they would travel a lot when they retired, but with dad in a wheelchair from MS, this hasn’t happened. Vacations in their 40s and 50s while dad could still walk would have been better.

Hindsight is perfect but we must judge our planning without knowledge of our future. Balance in your life and savings is good.

IMHO

Leave a Comment

Current day month ye@r *

Previous post:

Next post: