An earlier retirement age requires a higher savings rate, while a later age lowers it.LaylaBird/iStockPhoto / Getty Images
It would be handy to have a single, simple rule for how much to save for retirement. I used to think 10 per cent of pay was a good number, but the true savings rate varies enormously depending on pay level and on when one begins to save.
The actual rate can vary between 7.8 per cent of pay and 22.5 per cent over and above contributions to the Canada Pension Plan/Quebec Pension Plan. The main reason that the savings rate is higher for high-income people is that CPP/QPP and Old Age Security pensions are geared for Canadians earning no more than the average national wage (about $70,000).
The savings rates in the chart below are based on the following retirement income goals (including CPP/QPP and OAS). If your final year’s pre-tax income is $60,000, I have assumed a retirement income target of 70 per cent of the final five years’ earnings. For $90,000, the target is 60 per cent, and for $180,000, it is 55 per cent.
While some readers may think these income goals are too low, they might in fact be a little too high. At least, that is what I concluded in a previous edition of Charting Retirement.
The assumed investment return also affects the saving rate. Here, I’ve used 5 per cent a year, net of investment fees. Achieving even this return might be a challenge in the future if interest rates stay low and if price-to-earnings multiples on stocks drop back to their historical mean.
Finally, retirement age is an important factor when setting the savings rate. Here, I have assumed age 64. An earlier retirement age would require a higher savings rate, and a later age would lower it.
I also want to touch on the situation for lower-income Canadians. Someone earning $40,000 a year in today’s dollars would have about $32,695 in take-home pay (after deducting federal and provincial income tax, employment insurance premiums and CPP contributions). Subtract another $1,700 for employment expenses (such as commuting and meals), and it brings net take-home pay down to $31,000 or $2,583 a month.
This is almost exactly the same net after-tax income a 65-year-old retiree could expect, assuming the retiree receives $760 a month in CPP pension, $735 in OAS pension and $1,097 a month in GIS (Guaranteed Income Supplement). So someone who never earns more than $40,000 a year (in today’s dollars) might not need to save at all.
The main takeaway: Higher earners who are not covered by a workplace pension plan should probably be saving more than they thought, and people earning less than the average wage as they approach retirement can probably save less.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca).