This month’s Faceoff is all about what clients need to save for retirement. Mary Chan and Janet Freedman are the featured participants.
How much is enough?
Mary: At Edward Jones, we look at what is suitable, which includes factoring a number of different components such as known income sources: government sources, personal retirement plans and defined pension plans from work, as well as known expenses. Additionally, variable income and expenses are included. But we are of a general recommendation that clients would need 70% to 90% of their pre-retirement income but obviously that will vary according to health, when you retire, what you plan to do when you retire and what your current base is before retirement.
Janet: I think the percentage is very much dependent on how high the person’s income is before retirement, how much debt they have prior to retirement, whether or not they have children—because children consume a lot of their after-tax income—and what modifications to lifestyle are they expecting to make. A number like 70% is put out by fund companies, banks and financial institutions that have a vested interest in people saving more. There’s a real problem when the bar is set so high that 80% of the population are going to say that’s going to be absolutely impossible.
Mary: I don’t want to eliminate the thought of 70% because it could be the right sum for a large number of people.
Janet: But I think we need to encourage people to be proactive in figuring it out because it isn’t rocket science. It’s basic addition that they learned in grade two. It’s not a cookie cutter approach. Maybe this is a great opportunity for planners to get out there and say to clients that they need to have a detailed plan done. But you can’t just sit back and just say you need 70% of my income when I retire.
Mary: We suggest 70% as a starting point for the dialogue. It may be a little bit of a cold shower, however, it gets the conversation going and if that conversation moves along, we’ve helped investors arrive at a better place so they have more options when they retire versus having no options or having decisions taken away from them.
Janet: In what way having decisions taking away from them?
Mary: For example, having to simply settle upon government resources in retirement versus having some personal resources to draw down from or being reliant on legacies that others might need to leave behind for them so they could have a reasonable roof over their head. Most people don’t like those type of options. I don’t believe in painting a doomsday scenario but I think having a frank conversation will help people make some of those tradeoff decisions early and on a day-by-day basis so they’re in the driver’s seat in the future.
Janet: I agree that we need to see what clients are actually spending now. People really have no idea how much they are spending and yes, there is going to be a lifestyle change. We need to get people to be realistic about what they are going to have and that tradeoff between enjoying life now and having the ability to do more in retirement. Some people seem to want to retire at 55. Well, if you retire at 55, you have to have a lot more money than if you retire at 65 or 70.
Mary: The tradeoff conversation is the hard conversation, isn’t it? They think the decision is really between ‘Do I buy a coffee at Tim Horton’s or Starbucks?’ when the question is really, ‘Could you have made that coffee at home?’ The sum of all such choices allows for that flexibility in the future. Things are not just going to magically occur or appear for them the minute they decide they are going to retire and start drawing down their Canada Pension Plan. I’m not sure if folks really recognize that their CPP pension income is an earnings-related dollar amount, for example.