How Much of Current Income to Save for Retirement?

[marrakech]

Greetings all - new to the group.

RRSPs aside, we've all heard save 10% of your income. We've also heard that we need 70 or 80 or 90% of our current income in retirement... just curious at to whether most "informed" people would consider these to be % of gross or net for each situtation?

thanks,

rak

[Shakespeare]

Save 10% of net, move up to 10% of gross, become a saver not a spender, and retire on 50% of gross.

[gummy]

When people talk about a portfolio worth umpteen million at retirement it always makes me shudder.
To get there from here, how much would you have to sock away?

If, at retirement in 40 years, you'd like to have a portfolio which is 20 times current annual salary (in today's dollars)
and
your salary increases at an inflation rate of 3%
and
your portfolio return is 8%
then you'd have to sock away about 17% of your salary



Example:
You're now making $50K.
Your salary increases at the rate of inflation = 3%.
You invest 17% of your gross salary. (That's 17% x 50K = $8500.)
The return on your investments is 8%.
Then you'll have a portfolio worth 20x your current salary in 40 years. (That's 20 x $50K = $1M, in today's dollars)

Mamma mia!
Poor Joe:
http://www.gummy-stuff.org/retirement-2.htm

[blonde]

During the working years the aim is to earn mega money...earn so much money that the option of SAVING/INVESTING is a no-brainer. Save/Invest minimum 30% of 'net'.

DO NOT go into debt. Own the slave/s vs being a slave.

Focus on being a 10%er.

The retirement years will consume more money than pre-retirement. I retired with a net income 110% of pre-retirement income. I voluntarily retired 10 years ago at age 55.

Consider the following guiding principles:

a) Money Talks.

b) Don't Trust Anyone.

c) The Need to be in the Loop...Insider Info.

d) Contribute Minimum and Withdraw Maximum Plus.

e) Look After #1.

BTW, most of the 90%ers and wannabees will have no option but depend on the Cdn social system to support their 'poor-person' status.

[martingale]

I invest 25% of my gross income monthly, add to that the portion of my mortgage payment that is repayment of capital, add to that whatever if anything my CPP payments are worth, overall it's somewhere over 33%.

As an absolute minimum you should be maxing your your RRSP contribution limit. That's just free money you leave on the table if you don't get that deducation. After that, just treat every future raise in pay as a raise in savings--if you're happy with your standard of living today, why do you need more? Save it instead!

[dakota]

We've also heard that we need 70 or 80 or 90% of our current income in retirement[i]

We've been retired for almost eight years and we get along very nicely on a pension of 60% of our previous income. Not having a mortgage or education expenses is a real help. I will confess that we are not world travelers. Guess it all depends on what you want out of life.

BTW Both pensions are indexed

[yielder]

We get by on 25% of my 1995 income. It's not so much what you make as what you spend. We've always kept fairly close track of our spending. By knowing what our expenses were, I was able to "retire" in 1995.

Mike

[Norbert Schlenker]

Executive Summary

* Traditional retirement planning assumes that a household's expenditures will increase a certain amount each year throughout retirement. Yet data from the U.S. Bureau of Labor's Consumer Expenditure Survey show that household expenditures actually decline as retirees age. Consequently, under traditional retirement planning, consumers tend to oversave for retirement, underspend in their early years of retirement, or postpone retirement.
* "Reality" retirement planning assumes that a household's real spending will decrease incrementally throughout retirement. The result is that clients can make more realistic retirement saving assumptions and will be able to retire sooner.
* The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary.
* Using Monte Carlo simulation, the paper runs hypothetical retirement income projections comparing traditional retirement planning and reality retirement planning. Under the traditional approach, the couple's nest egg would appear to be depleted by age 80. Under the reality approach, the nest egg at age 80 would be over $2 million.
* Such dramatic differences not only have implications for retirement planning, but for related issues such as estate, tax, and investment planning.

Reality Retirement Planning, Bernicke, FPA Journal

[CdnTrader]

I don't think you can assign a % of your working income to describe to anyone what they will need. 50% of a $100,000 salary for one person is 100% of someone elses salary ($50,000) etc..
I think you should target $50,000/yr.. You may be able to live on less, but in 10 years you may also need $60 K? CPP may well be there, but don't include it in your calculations, and it will be a bonus later.

But, what do I know.

[Bylo Selhi]

CPP may well be there, but don't include it in your calculations, and it will be a bonus later.

Seeing as how CPP is better funded than many if not most private DB plans, does your admonition also apply to them?

[CdnTrader]

Seeing as how CPP is better funded than many if not most private DB plans, does your admonition also apply to them?

What are you smokin' this morning?
You have to include your private pension plans (teachers etc) in your calc's. For many this is their only income upon retirement.
Sorry, thought you knew that. I don't have a pension.

[Bylo Selhi]

You said "CPP may well be there." That suggests some doubt on your part. If you doubt that CPP will be there then you (or rather, one) should be equally sceptical that private DB plans will be there for those who contribute to them. Hence [s]you[/s]one should also treat such plans as a bonus. Hence one should fund's one's retirement entirely from private savings.

What are you smokin' this morning?

I don't smoke.

I don't have a pension.

Unless you've been unemployed or worked outside Canada for all of your life, you do. It's called CPP.

[CdnTrader]

I assume the rest of the world Totally understood what I stated about CPP being treated as a bonus. You are, as usual, the exception... I rest my case.

[steves]

This "CPP won't be there... take early CPP, don't count on your pension" stuff has always struck me as industry self-serving hype.

After all, if the client is convinced that these entitlements will not be forthcoming, then guess what... he will leave his capital 'under management' and we all know who benefits from that don't we?

[Chuck]

Getting back to the main thrust of the article. I think it is very insightful. I think many folks here have already recognized it to be true (that one spends less as one ages, healthcare excepted).

I was also intriged by the net worth quintiles by age group. The older the wealthier seems to be the trend. Kind of flies in the face of the "what about poor fixed income seniors" hue and cry that has so much influence in politics. It appears that along with increasing their wealth, seniors become more adept at manipulating the system.

[Tanstaafl]

Getting back to the main thrust of the article. I think it is very insightful. I think many folks here have already recognized it to be true (that one spends less as one ages, healthcare excepted).

I was also intriged by the net worth quintiles by age group. The older the wealthier seems to be the trend. Kind of flies in the face of the "what about poor fixed income seniors" hue and cry that has so much influence in politics. It appears that along with increasing their wealth, seniors become more adept at manipulating the system.

Umm I will rethink it

[like_to_retire]

We've also heard that we need 70 or 80 or 90% of our current income in retirement

My goal has always been to replace 100% of my net salary at retirement, minus the amount I put away into saving for retirement each month.

If I live on that amount before retirement, then I know it will be sufficient once I retire, as long as I'm able to fully index it.

I reached that goal about a year ago, so I'll likely pull the plug within the next year.

ltr

[dakota]

I assume the rest of the world Totally understood what I stated about CPP being treated as a bonus

I have heard similar comments made since the inception of CPP!

Well I'm here and so is CPP

[Bylo Selhi]

I have heard similar comments made since the inception of CPP!

So have I going back to the 1970s when the divisional VP at my first job made it his mantra. It may have been true then and until the mid-90. Then a certain finance minister with prime ministerial aspirations initiated substantial reforms, including an increase in premiums to nearly 20% (employer plus employee.) These days CPP not only has a clean bill of health and is considered fully funded way past our lifetimes, but is the envy of the rest of the world (including Nirvana-to-the-south.)

[CdnTrader]

dakota:
I didn't state CPP wouldn't be available. I simply said it is best to treat it as a bonus. The age to start collecting it could be raised.

Are you related to bihi sello

[twocentsworth]

Marrakech: Read the new early retirement book "Why Swim With The Sharks" available through Indigo-Chapters. That should help you out since it's Canadian.

Cdn Trader: Quit smokin' whatever you've been smokin'. Bylo and Dakota are right about the CPP -- it will be there, although OAS is another thing since it's funded out of general revenue.

And before you ask, no I'm not related to bihi sello.

[eezee]

OAS will also still be there, unless your income is over 59000 (something) in which case some of it will clawed back, and so it should ( I guess)

[adrian2]

Then a certain finance minister with prime ministerial aspirations initiated substantial reforms, including an increase in premiums to nearly 20% (employer plus employee.)

Correction: nearly 10% (9.9% = 4.95% employer + 4.95% employee).

These days CPP not only has a clean bill of health and is considered fully funded way past our lifetimes, but is the envy of the rest of the world (including Nirvana-to-the-south.)

Envy of the rest of the world? Don't think so. There are many countries in which the state sponsored pension is something that one can live on, alone. In Canada, after 40 years of contributing the most you can get is about $10k a year (25% of average wage). That's a good start, but hardly enough on its own.

[j831robert]

Marrakech: Seems to me that all of the formulae concerning what amount one needs for retirement is based on an attempt to make one size fit all and that just can't work !

Your age, life-style (current and proposed), financial circumstances (debt free, no mortgage, etc) and aspirations re travel and the "good life" will all predicate the amount you need. Strangely enough, most of the discussions I have read on this subject seem to assume that there is a wife/partner silently 'priced in' (and, I suspect, without consultation). If you have a 'high maintenace spouse' does she get to 'retire' along with you and is she willing to be less 'high maintenance' in her retired state ?

The figures are fun to kick around but you must define your own 'needs' and 'wants'.

[Bylo Selhi]

Correction: nearly 10% (9.9% = 4.95% employer + 4.95% employee).

Thanks.

Envy of the rest of the world? Don't think so. There are many countries in which the state sponsored pension is something that one can live on, alone. In Canada, after 40 years of contributing the most you can get is about $10k a year (25% of average wage). That's a good start, but hardly enough on its own.

Look at the historical contribution rates which are considerably lower. Can anyone retire on a conservative portfolio that's funded from 3.6% of their working income? The almost-triple current contribution rates are intended to correct what would have been an unsustainable situation. In effect younger people today are overcontributing to help pay for the pensions of retirees who undercontributed to theirs.

What are the contribution rates of these "many countries in which the state sponsored pension is something that one can live on, alone"?