Is your Retirement Savings Target Really that Low?

Is your retirement savings target really that low?

Welcome to a new reading series on this site, Sunday Money, where we aspire to collate some of our favourite personal finance and investing finds from the blogosphere and provide some common sense commentary on those subjects.

One article we found of interest this week was from The Globe and Mail (subscription required), written by Frederick Vettese who is the former chief actuary of Morneau Shepell.

His headline was: Your retirement savings target is probably lower than you think.

We don’t really agree with that.

Read on!

Is your retirement savings target really that low?

Vettese suggests that the retirement savings target (RST) for certain middle-income couples is modest, and could be next to nothing for couples with a defined-benefit pension plan.

His assumptions on RST are based on the fact that a couple needs to replace about 60% of their final pay, before tax, to maintain the same standard of living in retirement.

While his RST value will vary depending on your age, income level, marital status and any mortgage payments or child-raising costs that remain; it is aligned with Vettese’s previous assumptions on retirement income planning.

In Vettese’s book Retirement Income for Life (review by My Own Advisor here), he mentioned this that, first of all, we agree with:

“Drawing down one’s savings in retirement is something very few retirees do well, even with the help of professional advisors.” – Fred Vettese, Retirement Income for Life.

His book reminded readers about these retirement income / RST assumptions to consider:

• If child-rearing and child-support costs are done, and assuming you live in a paid off home, then you can likely get by (and thrive) on 50% or less of your final salaried workplace income for retirement.
• Given our lower, prolonged interest-rate world (that is likely here to stay), you should consider lowering your portfolio’s projected investment returns in the coming decades AND also increase your equity to bond asset mix.
• Finally, you should consider creating your own pension (if you don’t have one at all) via annuities. He’s been on the record to say that you should use some (not all mind you!), maybe between 25-50% or so of your RRIF assets, to purchase a non-indexed annuity when you get into your 60s and 70s.

While these are good guidelines for sure, we struggle with the “RST” assumuptions overall.

While the article goes on to say that “ChatGPT suggests the RST should be eight to 12 times final pay”, we don’t believe in any RST value at all since all retirement income planning starts with the following in mind:

1. How much money are you going to spend, and
2. What are the dependable income sources you need to fund that spending.

This implies from us that retirement is not an age. 

Retirement is not an RST value.

Retirement spending is not based on final salaries at work.

Cashflows & Portfolios Retirement Income Planning Formula

Instead, we have a different take and use a different, but simple forumla on this subject. That formula is cemented by successful DIY retirees who engage with us, founded on our own personal early retirement planning work, and clearly justified by the work we do with all DIY investors seeking their own personalized retirement income reports from us.

Successful retirement income planning and spending is based on:

1. what you absolutely need to cover the necessities of life, including offsetting higher inflation,
2. what you want to spend to cover discretionary expenses, extras in life if you will, and
3. what must be available just in case life throws you any curves, money available to cover any unforeseen costs in any given year – i.e., keep some buffer since life is not a straight-line.

Is your retirement savings target really that low?

There is no doubt Fred Vettese is a financial expert and very good at what we does, we just happen to see things a bit differently founded on many real-life retirement case studies that are ourselves and our clients we are only happy to support.

Instead of worrying about RST values or other pre-retirement income planning rules of thumb, we suggest you get your own math/your own personalized reports, to see not only your retirement income needs, wants and buffer clearly but all the taxation impacts and estate values clearly too.

Need any support with some low-cost retirement income projections? We can help!

As passionate DIY investors, we offer up our time and expertise to help other DIY investors planning for retirement or in retirement – to optimize the cashflow from their portfolio.

We know we can help you out too at a low-cost compared to the services charged in the thousands and thousands of dollars by others!

If you are interested in obtaining private projections for your personal financial scenario, read more about our retirement projections services.

Thanks to all readers and members of this site, whether you are striving for retirement or are now in early retirement like us.

It’s a pleasure to engage with you and support you.

Joe and Mark

Additional Reading:

Why some Canadians are just not ready to retire at all – and what they can do about it!