Like most people, I have always heard that I am not saving enough for retirement and that I need to save more. Traditional thinking says that you will need 70% of your last year’s income in order to maintain your standard of living when you retire.
But is 70% really necessary, or even attainable?
Why 70% Might be Wrong
In their new book, The Real Retirement, authors Fred Vettese and Bill Morneau explain that aiming for 70% of our income isn’t realistic. That’s the bad news.
The good news is that you likely don’t need to aim for 70% because of a reduction in various expenses. Sure, retirement income may go down compared to when you are working, but so do expenses – and the drop is likely more than you think.
Related: How the New CPP Rules May Affect You
Here are a few costs that are either decreased or eliminated upon retirement:
- Canada Pension Plan (CPP) – this is deducted from your net pay each pay period and is not deducted from retirement income
- Employment Insurance (EI) – this is also deducted from each paycheque and does not get deducted from retirement income
- Retirement savings – since we spend most of our working lives contributing towards retirement savings (such as an RRSP), this is no longer needed when we retire
- Income taxes – assuming your income goes down, your total tax burden will go down accordingly
As you can see, aiming for 70% of pre-retirement income might not be needed because some expenses go down.
Reduction of Major Expenses
Along with some of the smaller expenses listed above, there are two major monthly expenses that are usually reduced or eliminated upon retirement – mortgage payments and the costs of raising a child.
Personally, we plan on paying off our mortgage early and are hoping to retire debt-free.
This will mean a significant savings each month, as the money we have put towards our mortgage would now go towards (hopefully) doing the things we enjoy. We will also enjoy a break on our municipal property taxes when we turn 65.
The costs of raising a child will still be there to some extent for most, but by the time most people retire their total monthly costs related to their children tend to go down.
The authors cite a recent study done showing that the annual costs of raising a child for the first 18 years is $12,800 (per child) each year – not including the costs of daycare. Yikes!
The good news is that this figure decreases significantly once they reach 18 years of age.
In our case, my wife and I have talked about having kids and we do plan on sending them to post-secondary schooling so this is something we will have to budget for. However, since our kids likely won’t be living with us by the time we are both retired, we would no longer be paying for extra costs like vehicle insurance, food, clothing and all other costs associated with children.
Employment Related Expenses
People tend to underestimate how much money they spend related to their work each month, and the numbers can be significant over time.
Some of the common expenses include: work clothing, dining out, parking, weekly drinks with coworkers, daily coffees, public transit, vehicle insurance, fuel, and possibly a housecleaner.
I’ve analyzed our spending and we usually spend about $500 per month related directly to work – which would be eliminated once we retire.
Pre-Retirement vs. Post-Retirement
Here’s an example of a couple who earns $120,000 per year and how their finances would look like once they retired:
|Description||Pre-Retirement ($)||Post-Retirement ($)|
|Canada Pension Plan (CPP)||(2,350)||–|
|Employment Insurance (EI)||(900)||–|
|RRSP contributions (7%)||(8,400)||–|
|After tax income||41,750||42,000|
The couple in the above example only needed 50% of their working (pre-retirement) income to maintain the same standard of living once they retire. The above scenario assumes that the couple retires mortgage-free and has two children. It also assumes they continue to pay towards their children’s education once they retire.
Each specific situation is unique but the point is the same – many people won’t require 70% of their current income when they retire in order to keep their standard of living.
Conclusion: we ran the numbers and determined for us we would need about 55% of our current income after we retire. There are bound to be changes, and unforeseen expenses that change things, but I am still surprised to see that we likely won’t need 70% of our working income when we retire. Aiming for about 50% is more realistic and achievable for us, and that makes it even more motivating.
Have you estimated how much money you would need upon retirement?