The financial world usually focuses its research and marketing on warning people that they aren't saving enough for retirement, often suggesting more than a million dollars is needed and offering to invest your money for you. So it was refreshing when a recent BMO Wealth Management report on retirement spending hinted that many people may not need to save as much as feared.
The study revealed that retired Albertans spend an average of $2,648 per month or $31,776 a year, a little more than the national annual average of $28,800. Robert Armstrong, vice-president of BMO Global Wealth Management, says it's important that retirees “use their saved income efficiently.” Indeed, two long-held mantras of the investment world have recently come under attack, namely that you will need to earn 70 per cent of your annual pre-retirement income once you do retire, and you should withdraw four per cent of your savings during each year of retirement to avoid outliving your money.
A study by the University of Waterloo brought to light the difference in three different levels of retirement spending for couples and the savings needed. A no-frills retirement, with renting rather than owning, public transit rather than driving, and no cable TV or alcohol, costs an average of $24,000 a year per couple. No retirement savings are needed, since living expenses are covered by Canada Pension Plan and Old Age Security benefits. A middle class retirement, with an average house or condo, one or two cars, an annual vacation and occasional eating out, costs a couple $40,000 to $60,000 a year, requiring retirement savings of $250,000 to $750,000. Some investment risk is likely necessary.
A deluxe retirement, with a large house or condo, two high-end cars, a vacation home or regular major vacations and upscale entertainment, costs a couple more than $100,000 a year. That requires retirement savings of more than $1.75 million, which means investing heavily in equities in RRSPs and RRIFs.
Pension expert Malcolm Hamilton of the C.D. Howe Institute says most couples don't need 70 per cent of their pre-retirement income once they quit work, are no longer raising children or paying down a mortgage, aren't commuting and making payroll deductions for social benefits. Conversely, 70 per cent may not be enough for retirees with significant debt, large medical expenses or an addiction to three-month cruises.
As for the four per cent solution of annual RRIF withdrawals to make retirement savings last until death, that guideline doesn't take into account today's longer life expectancy and a prolonged period of low interest rates that has reduced investment returns. Many financial analysts now advise withdrawing 3.0 or 3.5 per cent of your retirement savings annually.
This is why some people argue the federal government should eliminate minimum annual RRIF withdrawals completely, saying they force many people to outlive their savings. Governments counter that they need tax revenue from withdrawals regularly as people age, not in a lump sum upon death. Besides, folks can now move $10,000 of their RRIF withdrawals into a Tax-Free Savings Account each year and let it grow tax free.
Perhaps more worrisome than minimum annual RRIF withdrawals are the maximum annual withdrawals allowed from Life Income Funds. People changing jobs and moving their company pensions into Locked-In Retirement Accounts might be able to move half of their LIRA into their RRSP once they convert the LIRA into an income stream, such as a LIF. But they can take out only 7.83 per cent of their LIF at age 65, increasing annually to 22.4 per cent at age 85. The result of maximum allowable annual LIF withdrawal limits is that many people die with money left in their accounts that they couldn't get their hands on.