A Realistic Retirement Income Target

In The Essential Retirement Guide, author Frederick Vettese argues that the widely accepted retirement income target of 70 percent of final pay is too high. A more realistic retirement income target, according to Vettese, may be closer to 50 percent and in some cases could be as low as 35-40 percent (i.e. for couples who spent a considerable amount on housing and child-raising throughout their working years).

The book offers a contrarian’s perspective on retirement. It looks at a number of personal consumption scenarios for singles, couples, couples with children, high-income earners, and low-income earners. Personal consumption is what’s leftover after retirement savings, employment costs, income tax, mortgage payments, and child-raising costs.

Retirement Income Target

Couples that never raised children or paid a mortgage, for example, tend to spend more on themselves during their working lives and naturally want to continue doing so after retirement. This group is more likely to have a retirement income target of 70 percent.

Conversely, couples with above-average income that have paid a mortgage and raised children will have spent less on themselves. Their retirement income target will be closer to 50 percent.

Vettese goes on to define personal consumption in greater detail. It includes:

  • Food
  • Rent (if one does not own)
  • Home maintenance costs including insurance and property taxes
  • Household furnishing and equipment
  • Clothing
  • Transportation costs, including insurance
  • Health care and personal grooming
  • Travel
  • Recreation, hobbies, and entertainment
  • Education
  • Alcohol and tobacco
  • Gambling
  • Insurance (but not whole life)

Not included are expenses related to one’s children, retirement saving, mortgage payments, employment expenses, gifts of money, and income tax.

Curious, I looked at our own personal consumption this year and found that we spent about 44 percent on those items. Meanwhile, mortgage payments made up 10.5 percent, retirement savings 24.5 percent, taxes and other employment costs were 14.5 percent, and the remaining 6.5 percent was spent on kids’ activities and RESP contributions.

With our car completely paid-off next year our personal consumption will dip to 39 percent and our savings rate will rise to 30 percent.

Vettese preaches moderation in both one’s saving and spending habits so as to avoid periods of unnecessary financial deprivation either before or after retirement. That means finding something in-between the early retirement extreme saving ant and the YOLO live-in-the-moment grasshopper.

“Ideally, you want to save in such a way that you avoid extreme highs and lows in your personal consumption.”

Final thoughts

We’re told we need to save 10-20 percent of our income each year over our working life to be able to retire with a 70 percent pension. The financial industry – bloggers included – fixates on the need to amass a huge retirement nest egg at any cost.

Vettese argues that saving for retirement is a two-dimensional problem. The forgotten second dimension is the pre-retirement period where disposable income has to be sacrificed to feed the post-retirement income monster. The more you save in a given year, the less you have left over to spend, and vice-versa.

Related: What is a safe withdrawal rate in retirement?

The Essential Retirement Guide takes a deep look into the pre-and-post-retirement spending patterns of a wide-range of people. It presents a convincing argument that the standard 70 percent retirement income target is too high for many of us and that an appropriate target should be more in-line with our own personal consumption patterns – which happens to be around the 50 percent mark.

This type of approach strikes a nice balance between your present and future self. Smoothing out consumption throughout your pre-and-post-retirement years makes for more enjoyable living.

What’s your retirement income target? For those of you already retired, what percentage of your final pay are you living on?

Weekend Reading: Early Retirement Backlash Edition

I consider my financial freedom 45 plan to be aggressive, yet attainable. Reaching financial independence at a relatively young age requires discipline, sacrifice, and a lot of savings mixed in with a dash of frugality. But my plan pales in comparison to certain members of the financial independence / early retirement crowd who aim to leave the workforce in their early-to-mid thirties.

That’s the story behind CBC’s profile of Kristy Shen and Bryce Leung, authors of the Millennial Revolution blog. The couple ditched the idea of home ownership in pricey Toronto and instead used the $500,000 they saved to pursue their own idea of financial freedom – travelling the world and working on projects that inspire them.

Much like Sean Cooper, who paid off the mortgage on his Toronto home in three years, Kristy and Bryce drew the ire of readers who criticized the couples approach as ‘selfish’.

In a strange twist it turns out their financial advisor is notorious Canadian housing bear Garth Turner, who says he’s now fielding a bunch of phone calls from Millennials who are looking join the Millennial Revolution. There’s only one problem:

“I don’t create millionaires out of latte-sucking entitled kids craving retirement and work-life balance. Stop calling.”

Money Boss J.D. Roth, who achieved financial independence when he sold his Get Rich Slowly blog for millions, says we should be celebrating these success stories, not denigrating them.

“This young couple made some out-of-the-box choices. They acted as money bosses. The decision paid off. Sure, they enjoyed good fortune with their investment results, but so did many of us from 2010 to 2014. This couple’s story ought not be unique; it ought to have been the norm for personal investors during that time span.

A Wealth of Common Sense blogger Ben Carlson weighed-in on what it takes to retire early. He says you either need to save lots of money or have very little need for lots of money.

“Unless you inherit a boatload of money, there really is no secret for early retirement. There are no life hacks that will make it easier. It takes sacrifice and it’s certainly not for everyone.”

Perhaps what some of us really need is to give ourselves permission to make a big life change. We’re too cautious when it comes to big changes, but studies show that we’re generally happier when we take a leap of faith. That’s why Carl Richards is taking his family to New Zealand to live and work for the next 12 months.

This Week’s Recap:

On Monday I explained why I chose a 2-year fixed rate mortgage.

On Wednesday Marie wrote about the dollar store boom and what items cost less at places like Dollarama.

And on Friday I explained why University students should probably get a credit card.

Many thanks to Josh O’Kane for including my advice in his Globe and Mail column about whether to pay off student loans or save for a downpayment.

Weekend Reading:

These Money Pros liked how I acted as my own mortgage broker and shopped around before negotiating renewing with my existing bank.

The case against home ownership? Rob Carrick interviews an author who says renting is a beautiful thing.

Death to the single family home? A UBC sociology professor says single family homes are overrated and harmful to health of the city.

This blogger says debt motivates her in a way that savings never could.

Here’s how to cut your phone bill (and your clutter).

The latest Carrick Talks Money: How can I tell how good my workplace pension is?

Two Alberta men turned their layoffs into opportunities, each creating their own business.

Tim Cestnick explains four ways to transition out of business ownership.

What investors need to know about the active versus passive management debate.

This scoreboard may have you thinking twice about holding actively managed funds.

A classic math vs. behaviour decision. Investing a lump sum – should you do it all at once or over time? 

Jon Chevreau on why he won’t defer his OAS past age 65.

It’s harder now to save for retirement – so we have to invest smarter.

Frugal Trader answers a reader question: I have $1M networth – what’s next?

Adam Mayers talks to one driver who received a $600 car insurance surprise.

The Greedy Rates blog shows how to increase your credit card rewards by ‘stacking’ two cards.

Finally, Squawkfox blogger Kerry Taylor is known for making frugality and consumer savvy sexy, delicious, and fun. She’s also battling depression and wrote a courageous post after her psychologist asked if there were any positives that came from her depression. Thanks for writing this, Kerry.

Courage, it couldn’t come at a worse time.

Enjoy your weekend!

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