Using good retirement planning assumptions

At last, there is good news for retirement savers.

Almost everyone worries about how much is needed for a comfortable, worry-free retirement? It may be much less than you think.

Determining how much retirement income you’ll need is difficult, and incorrect retirement planning assumptions can lead to wildly inaccurate projections – and a nasty surprise. For this reason, it isn’t recommended that you use one of those online calculators.

A retirement plan will indicate things such as how much you need to put away, your required rate of return to achieve certain goals, potential stumbling blocks that could derail your plan and how you can protect your family from those financial pratfalls. A retirement plan is important, but an inaccurate plan isn’t much better than none at all.

I’m going to take a shot at my industry here. Lazy advisors may use rules of thumb that often miss the mark. The most common says that retirees need 70 percent of their pre-retirement income.

Related article: Ways to figure out how much you will spend in retirement

In fact, many retirees can live well on much less. I contend that advisors and financial institutions sometimes inflate that number to scare folks into investing more.

Pension expert Malcolm Hamilton—the closest any actuary will come to be a media superstar—has long challenged the 70-per-cent figure. Now, in their book, The Real Retirement, Fred Vettese, and Bill Morneau agree that many Canadians will need much less than the numbers often tossed around.

Vettese introduces what he calls the neutral retirement income target (NRIT) to provide a more accurate estimate. The authors carefully analyze the numbers with a large helping of common sense to conclude that the real target is often closer to 50 percent.

The NRIT determines how much of your current work income goes to day-to-day consumption, then estimates the retirement income needed to meet that level of spending. Vettese found that retirees sometimes enjoy the same level of consumption on much less than has been thought. Retirees spend less and enjoy tax benefits that working people don’t.

Vettese uses a couple with income of $110,000 who contribute 3.8 percent of their income to RRSPs, spend $1,100 a month on child-rearing and have mortgage payments of $1,633. Deduct income taxes and payroll taxes (CPP and EI premiums) leaving $46,600 to spend.

In retirement we no longer contribute to an RRSP, are raising children or paying down a mortgage. There are no payroll taxes and far lower income taxes. We often need less insurance and fewer vehicles.

As a result, Vettese’s sample couple needs an income of just $48,300 for the same consumption level as while they were working, only 44 percent of their pre-retirement income.

“The good news,” the book states, “is that if Canadians take the time to plan properly, most will be just fine, and many may actually be better off in retirement than they were during their working lives.”

Of course, income needs can vary widely. While I’ve seen some folks manage on 40 percent of their pre-retirement income, some require as much as or more as their work income. Please don’t just base your plan a 50-per-cent NRIT, as your number may be lower or higher.

It depends on what you want to do in retirement. Homebodies will need far less than someone who wants exotic travel. Also important is your pre-retirement income. A family with a $200,000 income may be able to make do with 40 percent, while a couple with $40,000 income may need 100 percent.

Don’t forget health-care costs and the possible need for long-term care in your plan.

With many Canadians carrying far too much debt and socking away nothing, no one wants to tell people to save less. However, Vettese makes a strong case that many families who are paying off their mortgages and saving modestly may do just fine on far less retirement income than what most advisors preach.

If you haven’t already done so, work with your advisor to do a written, goal-oriented retirement plan. Read this book first as it will help you prepare using good retirement planning assumptions. If your advisor tells you to save 70 percent, have him read the book also.


  1. Jin Won Choi

    That’s an interesting point of view. I guess I won’t be able to comment without reading the book, but I must say at first glance, I’m skeptical. Can you really replace even 50% of your income for 20+ years in retirement by saving less than 4% per year?

    A rough math:
    $4,000 saved over 40 years = $160,000 saved.
    $50,000 spent over 20 years = $1,000,000 spent.
    The investment gain will have to be over 5x on the total amount of savings.


      Wow, you’re promoting a book on investments, yet you publicly post numbers like that? Comparing straight addition with no investment earnings over 60 years?

      It’s like you have no idea that investment gain over long periods of time can easily exceed the 5X number you find so unbelievable.

      For someone who claims “Most financial advisors give unsound advice” (where’d you make up that tidbit?), you’re spewing some pretty random nonsense yourself. I guess the fact that you’re acting as a financial advisor and then post numbers like you just did kind of proves your point though.

      • Jin Won Choi

        Lol. Yes, I use straight additions as a short cuts to quickly gauge the validity of math. I use lots of short cuts like that, and you’ll find other competent financial professionals also use short cuts. But we do a thorough analysis for our clients.

        Seriously man, you should lose the attitude.

        Hit me with a series of numbers that prove that I’m wrong, and then I’ll reconsider. Just remember these:

        1. If couples usually earn and save much less in their earlier lives. So if $4,000 is how much they saved, they saved way less before.
        2. Remember to inflation adjust their spending.
        3. Remember that most people are not 100% in stocks
        4. Remember that stocks are very volatile, so even if you make the numbers work with 100% in stocks, there’s a very good chance the investment plan won’t work.
        5. Remember to work with today’s environment where 10 year Canadian gov bond yield 2.9%

        I look forward to those numbers!

    • John

      I think your figure $160,000 saved may be a little low due to the fact that much of the $4,000 has been compounding for 40 years. That can translate into some pretty large numbers. I manage 3 investment portfolios(mine, my wife’s and my mother’s). Our portfolios are all equity. My 89 year old mother has been drawing on her portfolio for 29 years and it is larger now than when she started withdrawing. Ditto for my wife although she has only been withdrawing for 8 years. My point is models don’t seem to reflect real life.



    >>>I use straight additions as a short cuts to quickly gauge the validity of math.

    You’re promoting yourself as a financial advisor and yet you think that using straight addition as a way to mimic compound interest is valid. You’re worse than the financial advisors you’re denigrating on the homepage of your website.

    >>>I look forward to those numbers!

    Don’t be facetious. I assure you, you’re not the only one who has a grasp of math on the internet. In fact, given what you’re spewing so far, I’m left to wonder what sort a grasp you actually have.

    • Jin Won Choi

      I actually took the time to do a proper analysis after your comment. You should check back to my blog in 2 weeks time. I have some detailed numbers for you, and you’ll see the full logic behind my short cut, and why my skepticism was pretty accurate. I’d post it sooner, but I’m on a schedule.

      If you have a problem with my math, you can point it out to me there.

      That is, if this is still about my math, not slinging mud at me.


    >>>That is, if this is still about my math, not slinging mud at me.

    I’m slinging mud at you because you are sullying the reputation of an entire industry with your approach. Your absurd math simplifications (0% interest over 60 years, and then going to justify that with a blog post) are only the start.

    You should reconsider what you’re doing for a living. The stuff you’re doing is the kind of stuff that gives financial advisors a bad name. Leading on your site with slamming an entire industry is a good start with the kind of thing you’re doing wrong. Let’s not even get into the absurdities in your ‘book’ on life insurance. Where’d you do your research, on the internet?

  4. Paul

    >>“The good news,” the book states, “is that if Canadians take
    >> the time to plan properly, most will be just fine, and many
    >> may actually be better off in retirement than they were
    >> during their working lives.”

    I doubt it.

    Most financial advisors assume annual investment growth of 6% or 7%.

    That has not been the case over the past 13 years.

    I think over the next decade we’re likely to see annual growth of 4% – in which case most of our pension pots will be significantly smaller than what our advisors have forecasted.

    With low stock market returns, terrible bond yields and with defined benefit pension systems all but extinct (except for those lucky existing members), you need to save as much as you can for your retirement.

  5. Amanda Steeley

    Hi Wayne,

    It’s important that we are realistic when we are planning for retirement.

    According to the 2013 Employee Benefit Research Council Institue Retirement Confidence Survey (EBRI), 41% of workers said the top reason they aren’t contributing or aren’t saving more to a retirement plan is because of daily expenses and the cost of living.

    This article gives good information on how to realistically plan for retirement:

  6. Don Shaughnessy

    I modeled this. I believe the saving rate was 3.8% to an RRSP. So suppose we assume this will increase each year. I have used 5.25% yield and 3.25% inflation. I started withdrawals at $50,000 and inflated those too. The money would last to the end of year 60 as required. With 2 caveats.
    The 50,000 drawn in year 41 is worth only about 1/3 of what it was in year 1 and it is taxable. If we assume tax at 30% then the available spending amount is about 23% of the beginning spending. So to some extent both are right and to some extent both are wrong. The numbers work but what the numbers mean is not expressed properly. This true in most naive forecasts of this type. I personally am unable to forecast next Monday and even if the averages work out on a geometric average basis, the order of the returns could seriously damage you. Realistically you cannot do a road map to retirement. You can however, hire a guide. Good topic. Thanks both.

    • Jin Won Choi

      Hi Don, if I understand your calculations correctly, you should have inflated $50,000 from year 0 and 40 as well, and not wait until 41. I’ve always worked with after-inflation numbers. I know very few people who can survive on less than $17,000 a year.

  7. Don Shaughnessy

    Hi. The question is saving 3.8% of income for 40 years and spending $50,000 starting in year 41 would there be capital there at the end of year 60 and what would I need to assume about inflation and yield to make it so. The question of surviving on $17,000 is not pertinent unless you know all the other income sources. Maybe they are both teachers and maybe the $17k is the right amount.

  8. jay

    Want to see a real scam of a PP? CCWIPP (UFCW) …try getting info , if you want to get your vested amount you may get 1/3 of ture value

  9. Maria James

    Its always hard to determine the exact amount required for a comfortable retirement life. I as a financial expert suggest to invest in right areas when you are on Job, create retirement accounts and manage your money with the help of a professional financial plan. Taking help from financial planners will always help you a lot to spend a happy and stress-free retirement life.

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