How Much of Current Income to Save for Retirement?

[adrian2]

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.

Which makes CPP a below average deal for young people. A different back of the envelope calculation to reach the same conclusion: if 10% of gross salary, contributed for 40 years, is going to replace 10% of your salary per life, to replace 3/4 of your salary one would have to contribute 30% of gross salary for 40 years. Most people, including myself, would say that they can do better than that.

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

Sorry, don't know the answer.

[Bylo Selhi]

Which makes CPP a below average deal for young people.

The claim isn't that CPP is fair, only that it's funded for the next 75 years.

(Actually, maybe it is fairer than we imagine. When your generation become seniors perhaps you too will have the same political clout to force your kids to subsidize your retirement )

Most people, including myself, would say that they can do better than that.

What most people will say is not consistent with what most people will do. We've covered this ground before. Left to their own devices, most people probably will succumb to all manner of behavioural pitfalls. I suspect, however, that if CPP could be recreated from scratch, with everyone contributing "fairly," the new CPP would be superior to individually-managed retirement accounts.

[adrian2]

Most people, including myself, would say that they can do better than that.

What most people will say is not consistent with what most people will do. We've covered this ground before. Left to their own devices, most people probably will succumb to all manner of behavioural pitfalls. I suspect, however, that if CPP could be recreated from scratch, with everyone contributing "fairly," the new CPP would be superior to individually-managed retirement accounts.

Maybe. In its current incarnation, however, it is a pityful deal for young people.
Not even the most conservative financial plan I've seen would let a person contribute 40 years @ 30% of gross income in order to re-create 75% of gross income at age 65.

[dakota]

Maybe. In its current incarnation, however, it is a pityful deal for young people

Well...you know we also went through that stage and with more justification than you have now.

When I started contributing all older people would get full pension if they contributed for 10yrs. This was gradually reduced for the later contributors

I think that for a lot of low income earners this is a hell of a good deal because a lot of small to medium companies do not have a pension plan of their own but are forced to contribute to CPP so the workers will at least have some income over and above OAS.

What am I saying..." lot of small to medium companies do not have a pension plan"! The company that I was working for at the time 'Bata Shoe Co' employing thousands of people had no pension plan at all except for the very senior executives.

I sincerely believe that the CPP was a great idea and those who disagree at the present time may come to agree as time passes.

[dakota]

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

The age when you receive your CPP is already flexible from age 60 to age 70 and your pension will decrease or increase accordingly.

If I'm related to bylo...not that I'm aware of but who knows in this world

[adrian2]

Well...you know we also went through that stage and with more justification than you have now.

When I started contributing all older people would get full pension if they contributed for 10yrs. This was gradually reduced for the later contributors

Yes, that was unfair. But don't forget that we've been paying recently almost triple what you've been paying initially. Triple for the same promised benefit. Not even investing in a high MER mutual fund compared with an indexed ETF would normally lead to such a difference in final outcome.

I think that for a lot of low income earners this is a hell of a good deal because a lot of small to medium companies do not have a pension plan of their own but are forced to contribute to CPP so the workers will at least have some income over and above OAS.

What am I saying..." lot of small to medium companies do not have a pension plan"! The company that I was working for at the time 'Bata Shoe Co' employing thousands of people had no pension plan at all except for the very senior executives.

I sincerely believe that the CPP was a great idea and those who disagree at the present time may come to agree as time passes.

Hell of a good deal? Hell, no. For many it may be the only form of savings, but it's still a pitiful deal - around 0% real return for investing for four decades, IIRC. We are paying back irresponsible promises made in the 60's.

[ghariton]

We are paying back irresponsible promises made in the 60's.

Yes. And we can't even blame Trudeau for that one.

As I recall, at the time there was some debate as to whether the CPP should be funded versus whether it should be pay-as-you go. But older Canadians at the time had a very high poverty rate, and the Pearson government was determined to do something for them while they were still alive.

Actuaries worked out as early as 1964 that the plan, as it was then, was very fragile. And so it turned out to be.

But I do remember Monique Begin, around 1980 or so, being interviewed on radio and challenged on the pay-as-you-go aspect. She sounded truly bewildered -- how else would you design a pension plan?

Of course, all that is history now. But the CPP might still be at some risk. Consider, for example, the situation if Quebec separates and the federation breaks up. Will the individual provinces pick up the obligation? Will they be able to? (Remind me to diversify out of RRBs.)

And I think that is the lesson. Diversify your sources of income in retirement, not just against financial risk, but against political risk as well. For example, have children and educate them to the best of your (and their) ability. Human capital is a really important way to diversify.

George

[Bylo Selhi]

Executive Summary

Coles Notes (free reg req or free starting Monday at http://www.uexpress.com/scottburns/ )

[Shakespeare]

I have felt for several years that the assumption of constantly-increasing retirement spending is wrong. In fact, were it not for the house I have just bought, my spending would now be starting to drop.

[rmark]

Early retirement more travel, late life more medicine, for level spending throughout.

[Shakespeare]

for level spending throughout.

You get tired of the travel. And health care costs don't really escalate until near the end. That leaves a long period where spending isn't that high.

[nadreck]

All of this about what people do in retirement is very subjective. In actual fact I have seen a 94 year old who regularly took his cessna out of his hanger by hand and flew it (btw in the US no one can get hull insurance on an aircraft after age 80). Some people slow down more than others and some people want more or less money at different stages of their lives for a variety of reasons.

Personally I don't know what I will be doing 20 or 30 years from now. I just want to make sure I have a reasonable set of options available to me.

[gummy]

When we were young(er), with four kids and a mortgage, our $X / year spending was mainly determined by necessary expenses.

Now, just the two of us (retired), we can choose to spend more or less than $X ... and often do both, in successive years!

I suspect that such a choice is available to many retirees
- which makes the calculation of "How much do you need?" a particularly interesting calculation

[dakota]

When we were young(er), with four kids and a mortgage, our $X / year spending was mainly determined by necessary expenses.

Now, just the two of us (retired), we can choose to spend more or less than $X ... and often do both, in successive years!

I suspect that such a choice is available to many retirees
- which makes the calculation of "How much do you need?" a particularly interesting calculation

I think you're right, I bought a new truck last year which I won't do again for a few years.

[dakota]

When we were young(er), with four kids and a mortgage, our $X / year spending was mainly determined by necessary expenses.

Now, just the two of us (retired), we can choose to spend more or less than $X ... and often do both, in successive years!

I suspect that such a choice is available to many retirees
- which makes the calculation of "How much do you need?" a particularly interesting calculation

I think you're right, I bought a new truck last year which I don't expect to do again for a while.

[Bylo Selhi]

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

New Advice to Retirees: Spend More at First, Cut Back Later is about the FPAJ article. This bit of candour that ends the piece made me smile:

Mr. Bernicke, who is 30 years old, said he is saving furiously for his own retirement. He advises others to save as much as they can in their working years, and not to count now on spending a big part of their nest egg immediately after retirement. Such thinking isn't wise, he said, "for younger people who are just starting to save."

[biker]

On Frontline (PBS) May 16th is a 60 minute program "Can you afford to retire".

[biker]

http://www.pbs.org/frontline/retirement

[Bylo Selhi]

Retirees get fill by turning extra time into money

When people retire, their spending on food tends to decline. Dramatically... At first blush, this seems disturbing: elderly persons deciding between food and medicine or impairing their vitality through poor diets. But the researchers found that "neither the quality nor the quantity of food intake deteriorates with retirement status." Rather, retirees spend more time shopping for and preparing food. In effect, retirees substitute time for cash. They spend less money, even as food prices keep rising, but shop and produce meals more effectively... The research, published in the Journal of Political Economy, provides solid evidence to validate suspicions about senior-citizen frugality. The paper, titled "Consumption and Expenditure," won the 2006 Paul A. Samuelson Award given by investment firm TIAA-CREF in honor of the famous economist. Hurst said he expects that the findings apply to investing as well as to eating, but with a caveat: broadly based investing, yes; hunting for a particular stock, no...

In anticipation of the Baby Boom shift to retirement status, economists, including Samuelson, recently coined a new verb: bogleize. The term derives from Jack Bogle, the founder of mutual fund giant Vanguard Group and a longtime advocate of simple, low-cost investing through index mutual funds. Bogle makes a strong case that fees and expenses rob investors of the chance to earn the returns offered by the stock market. To bogleize an investment program means to strip it of needless costs and fees.

[Jo Anne]

Retirees get fill by turning extra time into money

When people retire, their spending on food tends to decline. Dramatically... At first blush, this seems disturbing: elderly persons deciding between food and medicine or impairing their vitality through poor diets. But the researchers found that "neither the quality nor the quantity of food intake deteriorates with retirement status." Rather, retirees spend more time shopping for and preparing food. In effect, retirees substitute time for cash. They spend less money, even as food prices keep rising, but shop and produce meals more effectively...

Someone had to do a study to figure this out?!?!?!

Oy.

[Bylo Selhi]

Someone had to do a study to figure this out?!?!?!

Evidently, judging by how many posts have been devoted on this forum alone to debate what percentage of one's former employment income is enough in retirement.

In our own experience, we're now rarely so busy that we're forced to "grab a bite" at a fast food or take-out place. So when we do eat out, it's much more leisurely, better quality and hence more expensive. Quality, not quantity. Our grocery bill is now higher because we buy more and better there.

[WishingWealth]

BYLO:
"So when we do eat out, it's much more leisurely, better quality and hence more expensive. Quality, not quantity. Our grocery bill is now higher because we buy more and better there.
"

Exact ditto for WW; into 2nd. retirement year.

WW

[kcowan]

"So when we do eat out, it's much more leisurely, better quality and hence more expensive. Quality, not quantity. Our grocery bill is now higher because we buy more and better there."

Exact ditto for WW; into 2nd. retirement year.
WW

Ditto for us into 5th year. In fact, because we buy few toys and clothes compared to our working lives, many gifts are now fine dining certificates. Plus we eat out while travelling, another higher expense. But that shows up as travel not food.

[sydney2]

Just retired this year, although doing a bit of part time work, however with more time, I just saved 18.00 today baking a beautiful cake. Store bought $19.99, Duncan Hines with icing $2.00... I never had time to do this before, never enjoyed it either, but now, no rush, no bother, and I agree with upthread posts, we eat better at home and when we go out, that is our source of entertainment with family and friends.

It is ironic that we save for so many years, only to worry if we have enough, I personally don't care, freedom 55 is here although 10 years later......

[blonde]

Spouse and I are in retirement year #13.

We do all the things we did in our previous life...just twice as much, twice as hard, and twice as often...

Retirement is to enjoy the fruit of the harvest...Do it while both can...

It is mandatory to have 'Cash-Flow' in the retirement years...Mega-Cash-Flow...

BTW, trust me, believe me.