The Perfect Retirement Myth

by Mike Holman

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.

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