FP Answers: Do I really need 70% of my work income to retire comfortably?

Posted on by Duane Roberts

Retirement Personal Finance

There are several rules of thumb for determining whether you have enough for a full retirement, but here’s a better way to determine for yourself

An empty bucket is not good, but an overfilled bucket can be worse because it means you didn't do things when you could have. An empty bucket is not good, but an overfilled bucket can be worse because it means you didn’t do things when you could have. Photo by Getty Images/iStockphoto Files

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By Julie Cazzin with Allan Norman

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Q: I’ve read that in retirement you need about 70 percent of your employment income and I’m wondering if that’s correct? How do I know if I have enough? — Juliette in Toronto

FP answers: Hi Juliette. Forget that 70 percent and embrace your mortality for a moment. What if you approach your retirement plans by thinking about what you want to do and achieve while still being fit and able, recognizing that time is flying by? How much money is enough to give you that lifestyle so you never have to worry about running out no matter what?

To help you understand if you have enough and where the money is coming from, imagine a bucket, and in the bucket are your registered retirement savings plans, registered retirement income funds, tax-free savings account, and cash. These are your liquid or redeemable money that is available to you at any time.

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Above this bucket can be a house, cottage, rental property, business and/or retirement plan. These are your fixed assets, and some of those assets, such as the rental home and retirement, will drip money into your bucket.

Ideally, you’ll have enough cash in your bucket that you’re never forced to sell any of your fixed assets.

As you work, add money to your bucket. When you retire, Canada Pension Plan (CPP) and Old Age Security (OAS) are added to your bucket.

As you add money to your bucket, it naturally drains through one of the three faucets.

The first tap is to pay for your lifestyle while you work. Once you stop working, the second faucet, the retirement faucet, kicks in and you may find yourself spending more money because you have more time to do things. At some point, the pension tap will unfortunately be turned off.

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The third and final tap is turned on when you are too old to enjoy yourself and can no longer physically/mentally do the things you used to enjoy. Eventually this faucet will shut off and you’re gone – that’s the end of you.

Is your bucket empty, does it overflow or do you have just enough?

An empty bucket is not good, but an overfilled bucket can be worse because it means you didn’t do things when you could have. Things like traveling or helping your kids when they need help. Perhaps you ended up working longer than necessary.

In other words, you don’t want to get to that last tap and realize you have the money, but no longer the time.

What’s going to happen to your bucket, Juliette? Will it run dry and what is the reason if so?

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Is your house rich and poor? If you don’t have time to add anything to your bucket before you retire, then you need a strategy that uses the equity in your home to fund your lifestyle: downsizing, selling and renting, a reverse mortgage, etc. .

Or are you spending more than your income, or perhaps not saving enough? Now is the time to get your finances in order, and the sooner the better.

Maybe you have enough money in your bucket and don’t know it with all the money going in and out, the taxes you pay and the different valuation percentages for your fixed and liquid assets. The problem with not knowing if you have enough is the fear of spending money. You realize when you reach the age of 80 or so that you could have done something earlier in life if only you had known.

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Finally, your bucket may be overflowing with money and the sooner you know with confidence the better.

Now, Juliette, I want to ask you: Knowing that you are thinking about retirement and that time is passing faster and faster, what do you want to do with the time you have left? Will 70 percent of your employment income cover it? What does your bucket look like and what actions should you take now, if any?

Allan Norman, M.Sc., CFP, CIM, RWM, is both a Certified Paying Financial Planner at Atlantis Financial Inc. and a fully licensed investment advisor at Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This comment is intended as a general source of information and is intended for residents of Canada only.

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This post FP Answers: Do I really need 70% of my work income to retire comfortably?

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