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Trying to Make Sense of the Retirement Income Challenge

Trying to Make Sense of the Retirement Income Challenge

Written by: Michael Banwell, B.A, CFP Banwell Financial Inc.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is considered by many to be Canada's most influential think tank.

In 2010 the C.D. Howe Institute produced a research paper titled:

Canada's Looming Retirement Challenge:

Will Future Retirees Be Able To Maintain Their Living Standards Upon Retirement?

This 28 page document seeks to address Canadians' state of retirement preparedness across various income groups.

This BFI commentary does not attempt to reiterate this excellent research paper, but is an effort to offer constructive, and thought provoking commentary for our clients in an effort to assist with retirement income planning.

One commonly used rule of thumb is that a gross retirement income equal to roughly 70% of gross pre-retirement earnings allows individuals to maintain their standard of living after retirement. This rule ignores the substantial differences among individuals in the relationship between gross income and consumption...
Page 6 of the paper

As investment advisors and financial planners we have in the past suggested a gross retirement income target in the 60-80% range. We have acknowledged, however, it can be extremely difficult to make broad based recommendations when income and consumption vary dramatically between individuals.

We offer the following commentary:

Income taxes, paying off a mortgage, and raising children often leave only 30-50% of gross earnings to be used for consumption purposes in our working years. If this is indeed true for most Canadian families this would suggest a 70% target of pre-retirement gross income in retirement years could be high.

Consumption purposes defined as current needs such as food, clothing, grooming, transportation, entertainment and insurance. Personal consumption excludes cash outlays for paying off your mortgage, child-raising, and saving for retirement. Personal consumption also excludes income tax.

Standard of living and consumption levels in the last 10-15 years before retirement may be a useful indicator of future consumption requirements. It is worth noting that during this period although the mortgage may be paid, and the children out of the house playing catch up with savings can continue to suppress consumption levels.

Low income households may need even more than 70%.

High income households often have high consumption rates and therefore require a higher percentage of pre-retirement income to maintain the desired standard of living after retirement.

The number of years we spend working (potentially accumulating retirement capital) versus being retired when we are using up retirement capital can have massive implications on the adequacy of retirement savings.

...the principal finding of this study, however-that is, a projected gradual increase in the proportion of future retirees likely to experience a significant decline in their standard of living upon retirement...
Page 2 of the paper

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