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In my last chart, I showed that the retirement savings target (RST) for a specific middle-income couple is about 6.4 times their final pay, at least in the case of Canadians who rely mainly on their savings and government pensions for their retirement security. (It would be lower – even zero – for people with a defined-benefit pension plan.)
This estimate was based on the rather arbitrary assumption that this couple needs to replace 60 per cent of their final pay, before tax, to maintain the same standard of living in retirement. This week, we delve deeper by looking at different family situations.
Your RST varies depending on your age, income level, marital status and any mortgage payments or child-raising costs. It also depends upon how much you are saving for retirement in your final working years.
Ironically, the more you are saving in those final years, the lower your RST will be (yes, lower). That is because a higher savings rate translates into lower disposable income, so you need less retirement income to maintain that standard of living.
Let’s consider two basic situations. In the first, the couple is married with a steady level of mortgage payments in their final working years and some moderate child-raising costs.
In the second situation, the couple has no children and no mortgage payments (they could be renters), at least in their final working years. For each of these two situations we estimate the RST at three income levels: $70,000, $140,000 and $280,000.
The chart shows the resulting RST as a multiple of final pay varies widely based on income level. That is because OAS and CPP/QPP pensions are a higher proportion of one’s income at lower income levels, thus reducing the need for personal savings.
The RST also varies widely based on individual situations. Those with child-raising costs and mortgage payments - i.e. most of us - will have a lower target, because they never got to spend as much on themselves during their working years. Yes, they could aspire to a higher standard of living after retirement than they had while working, but this is not what most retirees strive for.
Actual RSTs may deviate from these estimates based on the exact amount of CPP income, mortgage payments (I assumed 15 per cent of pay; if we assumed higher mortgage payments the RST would be even lower) and child-raising costs (I assumed 10 per cent to 15 per cent of pay). Still, this should provide most readers with an idea of their true savings goal.
If there is one basic message here, it is that most Canadians can breathe easier. The RST as a multiple of pay will probably be substantially lower than what AI tell you. ChatGPT suggests the RST should be eight to 12 times final pay, and cites large U.S. investment firms as a source. Those firms, of course, happened to benefit from higher amounts being saved.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
