Retirement income needs revised

So you think your clients have enough money saved for retirement? Well, think again. According to Fidelity Investments Canada, retirees need to save enough to earn between 75% and 85% of their pre-retirement income in order to live comfortably. That’s up to 21% more than the 70% that some advisors have pegged as the earnings benchmark.

“People in retirement have higher aspirations,” says Peter Drake, Fidelity’s vice-president of retirement and economic research. “They want to travel, be involved in new activities and may well change the place they live.”

In fact, buying a new residence is one of the big reasons why people need to save more. Traditionally, the over-60 crowd would sell their homes and buy something cheaper and smaller. Drake says while baby boomers are still buying smaller homes, they’re not necessarily spending less on them. “The conventional wisdom said that you should replace 60% to 70% of your pre-retirement income,” says Drake. “That presumed there was a downsizing in consumption. We’re seeing people downsize their homes, but they’re buying a condo that costs the same or more than the family house they sold.”

For people already planning to earn 70% of their pre-retirement income in their golden years, this new benchmark could derail some well-thought-out plans. Drake admits that some retirees will need to rethink their finances. “Undoubtedly there are going to be people who look at this and say, ‘I really do want to maintain my lifestyle in retirement and if I’m going to, I’ll have to step up in a couple of areas.'”

These areas include altering the client’s asset allocation and a person’s rate of savings. Drake says advisors need to talk to their clients about these things to determine if a new plan is needed. “The first decision that needs to be made is ‘do I want to spend more now or save more now.’ Advisors can look at what they have been doing and project that forward.” Once clients determine their optimal rate of investing, they should decide where they’re going to put their savings.

Even with a few financial alterations, 80% seems like a high figure. But Drake says the previous benchmark was “really based on assumptions.” To arrive at the new number, Fidelity looked at various factors including consumption, taxes, savings and government benefits. It then researched the tax structures and income levels in each province, and eventually came up with the 75% to 85% range.

For some advisors, though, this number is meaningless. Dave Stewart, principal at Stewart & Kett Financial Advisors, says he looks at cash flow rather than pre-retirement income. “What I do for clients is look at how much capital they’ve got. I don’t know that we stick to any particular percentages.”

He says dealing with income could mean just straight interest and dividends, while cash flow takes into account everything from spending to capital to income. “In an extreme case,” says Stewart, “someone could have a growth portfolio where the stocks don’t yield any dividends at all. He might not receive income, but he might double his money.”

One way to save clients money, he says, is to find ways to cut down on money management fees. “If you have an investment management fee of 2.5% versus 1.25%, that has a big impact on your spending.”

Despite Stewart’s different take on retirement planning, he agrees that is calculating how much one should save is a difficult process. “People want a simple answer to what is a very complex question,” says Drake. “We can put out benchmarks like this, but when it comes down to the level of the individual person [and how much they should save], they have to look at their own circumstances.”

Filed by Bryan Borzykowski, Advisor.ca, Bryan.Borzykowski@advisor.rogers.com