How Much Of Your Income Should You Save

In a recent post, I shared with you that most of us can enjoy a similar standard of living in retirement if we have roughly 50% of our pre-retirement income. This is possible because:

1. We no longer have some major expenses at retirement such as raising children, paying the mortgage, saving for retirement, paying payroll taxes (Employment Insurance, Canada Pension Plan contributions).
2. We may also be able to reduce other expenses like getting rid of a second car, buying lunch every day, and spending money on work clothes.
3. We will start collecting both Old Age Security and Canada Pension Plan payments in our 60’s that will last the rest of our lives and are indexed for inflation.

This 50% number was not a number that I came up with myself. The number came from actuaries like Fred Vettese and Malcolm Hamilton; well respected experts who have studied spending habits for millions of Canadians at different stages of life.

In fact, for many higher income earners (family income in your final year of working above $110,000/ year) the actual replacement percentage is between 41% and 44%. The 50% rate mentioned above includes the greatest swath of Canadians and also creates a little extra cushion to ensure a smooth transition to retirement.

If you still don’t believe me, watch this video for more detail.

So the question remains, how much do you have to save, year after year while working to give yourself an income stream that equals 50% of your working income. The answer varies depending slightly depending on your family income.

In general, you need to save 6-10% of your income depending on your chicken index. That’s all.

For example, if your family income is $110,000/year you could choose to save to save 6% of your income, each and every year for 35 years (age 30 to 65) in order to achieve your post retirement income goal. If you miss a year, you will have to double up the next year to catch up.

Another way to look at this is how much you should have saved by age 65 in order to have enough money to create an income steam that delivers 50% of your pre retirement income.

HOW MUCH OF YOUR INCOME SHOULD YOU SAVE?

HOW MUCH OF YOUR INCOME SHOULD YOU SAVE?



In a recent post, I shared with you that most of us can enjoy a similar standard of living in retirement if we have roughly 50% of our pre-retirement income. This is possible because:

1. We no longer have some major expenses at retirement such as raising children, paying the mortgage, saving for retirement, paying payroll taxes (Employment Insurance, Canada Pension Plan contributions).
2. We may also be able to reduce other expenses like getting rid of a second car, buying lunch every day, and spending money on work clothes.
3. We will start collecting both Old Age Security and Canada Pension Plan payments in our 60’s that will last the rest of our lives and are indexed for inflation.

This 50% number was not a number that I came up with myself. The number came from actuaries like Fred Vettese and Malcolm Hamilton; well respected experts who have studied spending habits for millions of Canadians at different stages of life.

In fact, for many higher income earners (family income in your final year of working above $110,000/ year) the actual replacement percentage is between 41% and 44%. The 50% rate mentioned above includes the greatest swath of Canadians and also creates a little extra cushion to ensure a smooth transition to retirement.

If you still don’t believe me, watch this video for more detail.

So the question remains, how much do you have to save, year after year while working to give yourself an income stream that equals 50% of your working income. The answer varies depending slightly depending on your family income.

In general, you need to save 6-10% of your income depending on your chicken index. That’s all.

For example, if your family income is $110,000/year you could choose to save to save 6% of your income, each and every year for 35 years (age 30 to 65) in order to achieve your post retirement income goal. If you miss a year, you will have to double up the next year to catch up.

Another way to look at this is how much you should have saved by age 65 in order to have enough money to create an income steam that delivers 50% of your pre retirement income.

How Canada Pension Plan And Old Age Security Fit Into Your Retirement Plans

Canada Pension Plan

If you work in Canada, you are already contributing to your retirement savings through the Canada Pension Plan. The government of Canada takes 4.95% of your pay and your employer matches this amount. The money is invested for you. When you retire, you are entitled to receive a monthly payment from the plan, indexed for inflation until you die.

The amount of your Canada pension will depend on how many years you worked between the ages of 18 and 65 and what your yearly income was during this 47 year period. As an example, if you earned at least $56,000 in 39 of the 47 years between your 18th and 65th birthday, you will earn the maximum pension payment of roughly $14,000/year.

If you earn less than $56,000 or work less than 39 years between your 18th and 65th birthdays, your pension will be smaller. You can contact Service Canada to get an idea of what you will be entitled to when you reach 65. You can increase your pension if you wait until 67 or 70 years old to receive it, or conversely, you can start collecting a reduced pension at age 60.

Old Age Security

Every Canadian is entitled to Old Age Security, whether or not you have ever worked in Canada. The yearly payment is roughly $7000/year indexed for inflation. Currently, you can start collecting OAS at age 65. In the next few years, the age of eligibility may increase to age 67. For high income seniors, there are OAS claw backs if they earn more than $72,000 a year.

So combined, CPP and OAS can mean a retirement pension of up to $2100 per person or $42,000 for a couple who earned $110,000/year in 39 of their working years.

This is a considerable amount of money and goes a long way in explaining why many Canadians can enjoy a good retirement by saving 6-10% of their income instead of the conventional 15% advocated by the financial services industry.

HOW CANADA PENSION PLAN AND OLD AGE SECURITY FIT INTO YOUR RETIREMENT SAVINGS

HOW CANADA PENSION PLAN AND OLD AGE SECURITY FIT INTO YOUR RETIREMENT SAVINGS


Canada Pension Plan

If you work in Canada, you are already contributing to your retirement savings through the Canada Pension Plan. The government of Canada takes 4.95% of your pay and your employer matches this amount. The money is invested for you. When you retire, you are entitled to receive a monthly payment from the plan, indexed for inflation until you die.

The amount of your Canada pension will depend on how many years you worked between the ages of 18 and 65 and what your yearly income was during this 47 year period. As an example, if you earned at least $56,000 in 39 of the 47 years between your 18th and 65th birthday, you will earn the maximum pension payment of roughly $14,000/year.

If you earn less than $56,000 or work less than 39 years between your 18th and 65th birthdays, your pension will be smaller. You can contact Service Canada to get an idea of what you will be entitled to when you reach 65. You can increase your pension if you wait until 67 or 70 years old to receive it, or conversely, you can start collecting a reduced pension at age 60.

Old Age Security

Every Canadian is entitled to Old Age Security, whether or not you have ever worked in Canada. The yearly payment is roughly $7000/year indexed for inflation. Currently, you can start collecting OAS at age 65. In the next few years, the age of eligibility may increase to age 67. For high income seniors, there are OAS claw backs if they earn more than $72,000 a year.

So combined, CPP and OAS can mean a retirement pension of up to $2100 per person or $42,000 for a couple who earned $110,000/year in 39 of their working years.

This is a considerable amount of money and goes a long way in explaining why many Canadians can enjoy a good retirement by saving 6-10% of their income instead of the conventional 15% advocated by the financial services industry.

DO I NEED TO SAVE FOR RETIREMENT IF I HAVE A COMPANY PENSION PLAN?

DO I NEED TO SAVE FOR RETIREMENT IF I HAVE A COMPANY PENSION PLAN?



First of all, consider yourself lucky that you are one of the few remaining workers in Canada that can still count on a pension plan at work. The once common defined benefit pension plan that paid out a guaranteed amount to a retiree every year until death is quickly dying out. In its place, most employers will offer to match any retirement contributions you make to your RRSP, up to a certain amount and then it’s up to you to decide what to do with this savings.

If you are extra lucky, your defined benefit pension pension also increases its yearly payment to you based on the rate of inflation. An “indexed” pension is the gold standard and very few people have one.

To answer the question above: if you have an indexed pension plan and you will have qualified for a full pension, usually after 30+ years of continuous service, there is no need to save further for retirement. Pensions use different methods of determining what your yearly payment will be, but after 30+ years of working, your pension will most likely be around 60% of your working years income. This is more than the 50% rule that we are striving for, so you don’t need any other savings.

Just make sure you have paid off all your debts, including your mortgage before your retire.

If you do not have enough qualifying years for a full pension, because you started your career late or took time off to raise a family, you may or may not need to suplement your pension plan savings to make sure you have enough to retire comfortably.

The Mighty Vanguard Does It Again!

Vanguard Canada just launched its newest and easiest low cost index funds and they are spectacular.  They are designed to be easy to buy and hold with the absolute minimum of required attention.

From Rob Carrick at the Globe and Mail:

”  The Vanguard Conservative ETF Portfolio (VCNS) has a 40/60 mix of stocks and bonds, respectively, the Vanguard Balanced ETF Portfolio (VBAL) has a 60/40 mix and the Vanguard Growth ETF Portfolio (VGRO) is 80/20. Each has a management expense ratio that should come in around 0.24 per cent, less than one-quarter the cost of the average comparable balanced mutual fund.”Each packs a globally diversified portfolio covering stocks and bonds into a single fund – a “one-ticket” solution, as they say in the investing biz.The portfolios are rebalanced frequently to keep the target mix intact”

Now what’s your excuse for not running down to you bank, asking to set up a self directed trading account and buying one of these 3 beauties? Repeat every year with 10% of your income until you’re 65 and you’re set.

The Mighty Vanguard Does It Again!

Vanguard Canada just launched its newest and easiest low cost index funds and they are spectacular.  They are designed to be easy to buy and hold with the absolute minimum of required attention.

From Rob Carrick at the Globe and Mail:

"  The Vanguard Conservative ETF Portfolio (VCNS) has a 40/60 mix of stocks and bonds, respectively, the Vanguard Balanced ETF Portfolio (VBAL) has a 60/40 mix and the Vanguard Growth ETF Portfolio (VGRO) is 80/20. Each has a management expense ratio that should come in around 0.24 per cent, less than one-quarter the cost of the average comparable balanced mutual fund."Each packs a globally diversified portfolio covering stocks and bonds into a single fund – a "one-ticket" solution, as they say in the investing biz.The portfolios are rebalanced frequently to keep the target mix intact"

Now what's your excuse for not running down to you bank, asking to set up a self directed trading account and buying one of these 3 beauties? Repeat every year with 10% of your income until you're 65 and you're set.