Thursday , 23 May 2024

You Might Be Saving TOO MUCH for Retirement – Here’s Why (+2K Views)

How much money do you really need to retire on? We’re bombarded with messages3col_lg_investment_titles_savings_and_others_reasonably_small about retirement savings – that…[we] haven’t saved enough; that company pension plans are underfunded; that the Canada Pension Plan [or U.S. Social Security] won’t be able to handle the influx of boomers who are set to retire over the next 10 to 15 years. If that’s you, then you might be panicking right now. Stop! According to a new book retirees may not need as much as they’ve been led to believe.

Let’s get real. Spending habits change throughout your lifetime.

During your early years,

  • you’re getting an education,
  • buying and upgrading your houses,
  • raising children,
  • sending them through university, and
  • making investments.

By the time you retire,

  • your children will be independent,
  • your mortgage is likely paid off,
  • your housing costs are likely much lower because of downsizing
  • your debt load is likely lower than in your earlier years, and
  • your vehicles are probably paid off and you sold off that extra car because you and your partner aren’t commuting to work anymore and
  • you’re likely reaping the financial benefits from the smart investment decisions you made early in life.

Financial analyst have been telling us that our annual retirement income should be around 70% of your pre-retirement income. However authors of The Real Retirement, Fred Vettese and Bill Morneau, suggest that retirees may only need to save approximately 50% of that.

The authors argue that the calculation need only look at the portion of preretirement income that’s been allotted to regular consumption…[Were one to:]

  • take out costs associated with children and child care;
  • take out the higher mortgage payments because you’re either mortgage-free or have much smaller mortgage payments, and
  • take out any costs associated with employment and also
  • factor in a lower income tax rate and other additional benefits offered to seniors

what you have left is considered regular consumption and that is the true cost of retirement living.

According Vettese and Morneau, they found that when the above costs are factored out [the calculation results in a] regular consumption costs closer to 30% of total gross income which is far from the 70% suggested by financial analysts….

Vettese, who is the chief actuary at Morneau Shepell, wrote that…only 7% of middle-income households have less than 75% of their pre-retirement income [in Canada] so soon-to-be retires are in excellent financial shape.  If you’re in that 7%, however, the question is “how much do I really need to save?” and it’s a big question, but not as big as you probably initially thought. Here are some factors to consider:

  • Company pension plan. If you have been paying into a company pension plan, find out exactly how much it will give you when you retire. Some plans are also matched by your employer. You also have to find out the rules to accessing those funds. Having a realistic idea of what you will get from your company pension plan means you can be more realistic about what you need to save.
  • Government benefits. The Canada Pension Plan and Old Age Security benefits [in Canada and similar benefits in the U.S. and other developed countries around the world] may be small but it’s still something. Find out how much you’re getting at retirement and if you’ll  get the full amount. If it’s $1,000 a month for example, that’s $1,000 less you have to save.
  • Part-time employment. A lot of retirees have decided to not stop working, opting instead for part time work to keep busy. If this is something you are planning for, then you can factor that into your calculations.
  • Spending. This is the big one. How much money do you plan to spend? Does your retirement plan include world travel, or a more relaxing lifestyle? Depending on how you answer these questions, your plan to save for that retirement will be different.

It basically comes down to this:

The amount you need depends on the lifestyle you choose to have. Once you determine what kind of retirement lifestyle you want, you can then put together a financial plan to achieve it…

The comments above are edited ([ ]) and abridged (…) excerpts from the original article written by Gina Monaco

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