# Income Required in Retirement



## Square Root (Jan 30, 2010)

Just read the article in the G&M about the percentage of pre retirement income required in retirement. I don't know if I am getting more cynical with old age or if I just have more time to think about this stuff, but it seems to me that these commentators continually confuse correlation with causation. It's not that retirees only need X% of pre retirement income but rather that's all they have so they adjust their budgets accordingly. My take away is "save as much as you can(within reason) and then spend as much as allowed by the accumulated nest egg". It turns out that due to luck and perhaps good planning we are spending about 30% more in retirement than before. This is because we can. Acknowledge that we are not typical but the stuff you read seems pretty poor to me. Any thoughts?


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## the-royal-mail (Dec 11, 2009)

I think this whole question of how much retirement income is needed is a moving target. So many variables.


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## steve41 (Apr 18, 2009)

I do this for a living, and in my experience, most individuals don't start saving in earnest until their mid to late 40s. By then, their mortgage is paid off, kids are on their way, they are comfortable in their career, and salaries are starting to grow comfortably.

The problem is that everyone has a different idea about lifestyle, pre and post retirement. Some prefer to live life when they are younger, and relax/wind down when they retire. Others prefer to scrimp when working and blow it off on travel, etc when retired. Then there are the higher NW types who concentrate on leaving an estate, or those who are anxious about care costs in old age.

My wish, albeit a tad self-serving, is that more people would plan their future in a mathematically-rigorous way instead of simply 'tracking their net worth' or itemizing their expenses month to month. The average home PC has more computer power than it took NASA to send a man to the moon and yet we don't use it for something as important as planning our financial future.


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## heyjude (May 16, 2009)

The notion of retirement *expenses* as a fixed percentage of employment *income* is meaningless, unless one is not saving while employed. True, if, while employed, expenses = income, then, based on anticipated lifestyle changes in retirement, one might expect retirement expenses to shrink somewhat due to lower commuting costs, work clothes, drycleaning, etc. But that confuses lifestyle with finance. 

Two employed individuals might have the same expenses, but one of them might have double the income of the other, and might be saving the excess. Obviously the saver will be in a better position to spend following retirement, and will be free to travel, golf, etc. in a way that the spendthrift cannot. 

I think the 70% "rule" became commonplace in the days of defined benefit pensions. But for most of us, such pensions are just a dream.


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## steve41 (Apr 18, 2009)

Look, it is complicated. A simple model involving salary, retirement age, age horizon (death), inflation, interest rate and an average tax rate is easily programmable.... as a web calculator or a spreadsheet. 

Unfortunately, our individual situations are much more variable. Loans, insurance, a salary which jumps around (planned sabbatical, partial retirement), windfalls such as an anticipated inheritance, selling the cottage, fluctuating lifestyle plans such as a new car every five years or a reduced post-retirement, future plans to sell the family home or downsize... combined with the complexity of different forms of capital (rrsp, lira, nonreg, taxfree...) and the complex way the tax regime comes into play over time (average tax rates just don't cut it, BTW), make the determination of a financial plan much more rigorous than that which a set of tables or a web-based calculator can deliver.


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## Square Root (Jan 30, 2010)

Agree Steve. That's why these type of stories are of little use. Save as much as you can while maintaining a little balance in your life then spend to that level in retirement. Work until you're happy with your available spending level in retirement.


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## steve41 (Apr 18, 2009)

Agreed SQRT. The problem is, that based on the known parameters I described ('known' to a degree) , an individual needs to invoke a mathematical process which quantifies these things. After all, he might be saving too much while he is working (living in partial penury) or scrimping too much in retirement such that his rotten kids will inherit a gazillion dollars. Or, the reverse might happen.

You need to be able to quantify what "save as much as you can" really means. It should be rephrased perhaps... "save as much as you can (but not too much)"


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## Larry6417 (Jan 27, 2010)

I think the old-fashioned, financial planning process is appropriate here.

Step 1: Establish goals, bearing in mind: _Man plans; God laughs._ For people several decades away from retirement specific goals (e.g. $40,000 per year for 25 years in constant dollars) are futile. At this point "save as much as you can without being miserable" is quite reasonable. 

Step 2: Gather information. Where are you starting from?

Step 3: Analyze the information.

Step 4: Develop recommendations/strategies based on steps 2 and 3

Step 5: Implement strategies from step 4. Unfortunately, some people don't fulfill this step.

Step 6: Monitor results and adjust as needed. This is awfully important because the economic landscape can change quickly. In just the last 3 years we've seen the introduction of the TFSA and income-splitting from RRIFs. People who started their retirement saving 30 years ago (or even 5 years ago) could not have forseen that. I think it's reasonable to fine-tune a retirement savings plan as retirement looms. Obviously, people have more choices if they started saving early in life. People who saved too little may have to work longer or live on less.

BNN had a retirement panel just recently. One of the points made, which I agree with, is that people don't plan for the retirement itself. That is, people plan for the financial aspect of retirement but not anything else. Recent retirement is a turbulent time; the divorce rate actually spikes. Another good point from the panel: If you don't enjoy exotic, adventurous vacations pre-retirement, you likley won't after retirement. People saving for such are fooling themselves unless they already enjoy doing the same pre-retirement.

I've actually changed my thinking a bit about saving. I used to be exceptionally frugal (others may have used the terms "cheap *******" or "skinflint"), but I've loosened up over the past few years. I'm still frugal and save more than average, but I enjoy some of the finer things in life too. One couple I knew was exceptionally frugal as well. They denied themselves over years so that they could have a "dream lifestyle" in retirement. The husband died shortly after retiring. The wife's health declined to the point at which she couldn't travel herself or do any of the grand things they'd envisioned. It's important to save for the future, but not to the point that you stop enjoying the present.


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## Square Root (Jan 30, 2010)

Larry/Steve- Good points. I could not imagine how I could have created and maintained a 20-30 year retirement plan. With a devastating divorce lasting throughout my 40's causing negligible net worth until almost 50. Everything kind of came together financially so I could retire at 56. Despite almost anal planning now it would have been nothing but a guess until age 50. Sometimes it's better to be lucky than smart.


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## sags (May 15, 2010)

This question always reminds me of an Abraham Lincoln quote.

Noting Mr. Lincoln's long legs, someone sarcastically asked him how long a person's legs should be. Mr. Lincoln's reply was "long enough to reach the ground".

And so it is with retirement income. A person needs to generate enough income to pay their bills and survive. Anything more than that is a bonus.


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## sags (May 15, 2010)

sorry, double post for some reason.


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## HaroldCrump (Jun 10, 2009)

sags said:


> Noting Mr. Lincoln's long legs, someone sarcastically asked him how long a person's legs should be. Mr. Lincoln's reply was "long enough to reach the ground".


Apologies for going OT, but one more:
A press reporter was interviewing Lincoln.
Lincoln put up one of his legs on the table to stretch.
The reporter said: "I've never seen such a long leg".
Lincoln promptly put up the other one and said "well, here's another one".


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