In my last chart, I showed that the average retirement period – the time from when we retire until we die – has changed over the past 35 years. It grew steadily until 2012 and then started shrinking as Canadians retired later.
This week we’ll explore how the retirement period affects our savings target – the amount we should be saving for retirement. This is relevant to Canadians who rely on their own savings to fund their retirement.
I will express the savings target as a multiple of one’s final pay, before tax. This multiple varies since it depends on an individual’s income level, marital status and any mortgage payments or child-raising costs.
To illustrate, let’s take a middle-income couple whose combined year’s earnings just before retirement are $135,000 - in today’s dollars, and correspondingly less in previous years. In the years leading up to retirement, they were still paying off the mortgage, helping out their children financially and saving in an RRSP.
Since all these expenditures will eventually drop off, I estimate that they should be able to maintain their standard of living in retirement with income at 60 per cent of their gross final employment income. (Note this figure is sometimes higher and often lower.)
From the last chart, we know the retirement period for each year since 1991; to be extra safe, we will add five years onto the retirement period to minimize the chances of running out of money.
The only other information we need to calculate the savings target is the risk-free real rate of return. This is the yield on real-return bonds and is reported monthly by the Bank of Canada.
That yield has been as high as 4.6 per cent (over and above the inflation rate) in the early 1990s but it dipped below 0 per cent in the first year of the COVID-19 pandemic. (This kind of volatility is another reason not to rely on rules of thumb for something as important as your retirement planning.) At the time of preparing this chart, the real yield is 1.83 per cent.
When we take all this data into account, the savings target for this couple would have ranged from 4.36 times final pay if they had retired in 1992 to as high as 7.2 times final pay in 2020. At present, the target is 6.4 times final pay, which means current retirees get a slight break versus those retiring five years ago.
To reiterate, the savings target depends on many factors and could be higher or lower. The real purpose of this chart is to show how much the savings target can fluctuate from one year to the next. In a future chart, we will look at how the savings target varies by the individual retiree’s situation.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
