How Much Retirement Income?

How much pension income should I have when I retire? This is one of the most difficult questions facing individuals and their advisers. How much income will be needed to cover basic needs? unexpected costs? fun? gifts? dreams? Clearly, the more one has made prior to retirement the more they are likely to want an adequate amount for fun, gifts and dreams. And, this has frequently led advisers to a replacement ratio focus. Perhaps a target of 70% to 80% of pre-retirement income, with all sources combined - employment retirement plans, social security, personal savings and part time income. For those without DB retirement plans, financial advisers often suggest that individuals should personally save towards a capital fund sufficient to provide 50% of pre-retirement income.

Are people saving enough to meet these targets? The answer, by and large, is no. People at the lower end of the income scale, who will depend heavily on social security, are not saving anything. Those higher up the income scale are simply not saving enough. A rule of thumb is that a person's pension income should be based on no more than a 4% to 5% withdrawl from their capital fund. For example, a person who earned $100,000 pre-retirement, with a target pension of $50,000 (using the 50% rule), will need a capital fund of $1,000,000 to $1,250,000. This seems like a lot of money, but investment earnings above 4% or 5% will be needed to cover future inflation and investment fees. While the person can still add social security to the personal pension of $50,000, they will still be some distance from their pre-retirement income level. All this may not have mattered as much years ago when life expectancy was much shorter, but people today are retiring in good health, may be dividing pension with a former spouse, may still have partially dependent children and have a variety of other expenses. The pension income is needed.

It can be argued that building a capital fund is solely the responsibility of the individual, but if they are not doing enough does the government have a role in narrowing the gap? The Dutch have a system of compulsory personal pensions that top up social security. International organizations have advocated similar tiered systems. These may also help those at the lower end of the income scale.

At the lower end of the income scale, the replacement ratio method of assessing pension needs doesn't work. People living at a subsistence level cannot live at 70% of that level after retirement. Here are links to a report that looks at retirement income from a basic needs perspective: link1 and link2

From that report, here are the costs of retiree basic needs in 2001. Costs have gone up since then, but it is clear that a couple needs pension income of at least 50% of the average industrial wage. For those whose pre-retirement income is less than the average wage, current social security benefits fall short of what's needed. This might be a starting point for governments to focus their efforts.

Typical Elderly Living Expenses

City	Single	Couple
Halifax	$13,315	$18,848
Montréal	$13,945	$19,579
Toronto	$14,913	$19,998
Calgary	$13,862	$19,512
Vancouver	$13,618	$20,200