CAN YOUR RETIREMENT INCOME PLAN SKIP THE SAVINGS ACCOUNT?

The following is an excerpt from our colleague, Iain Fleming, over at Great West Life. In his recent issue of The Monday Morning Muse, he highlights key points on an article he recently read in the Globe and Mail which sheds light on the link betweenguaranteed government benefits and saving for retirement.

Iain’s key takeaways:

1) Income Target
*    The Organization for Economic Co-operation and Development (OECD)
tracks retirement income data across its 34 member countries and has
established a ‘target replacement rate’ for retirement income
*    Based on this data, the OECD recommends that individuals put away 60
per cent
 of their gross pre-retirement income in order to maintain their
standard of living throughout retirement
*    Canadians can typically expect to receive income from Old Age
Security (OAS) and the Canada Pension Plan (CPP), as well as from any
employment pension income they are entitled to.  The Guaranteed Income
Supplement (GIS) may also apply in certain situations

2) Focus on income not savings
*    In Canada, the US, Britain and Australia, retirees earning the
average income can expect to receive between one-third and one-half of their
employment income from guaranteed pensions once they retire
*    However these figures shift in a meaningful way depending on how
much employment income you receive. As employment income rises above the
average (which in Canada is roughly $50,000), the percentage of that income
covered by guaranteed government benefits declines
*    For example, individuals who earn one-and-a-half times the average
salary may need to replace up to 75 per cent of their preretirement income
to hit the recommended target

3) Choosing a benchmark
*    While the OECD has suggested a savings target of 60 per cent of your
preretirement income, it is important to recognize that this is merely a
suggestion.  Some individuals plan on changing their standard of living upon
retirement and would therefore need to adjust their target accordingly
*    Whether one chooses to use a target of 60% or not, it is crucial to
understand that the greater one’s preretirement income, the greater the
amount of additional savings is required
*    In other words, individuals who earn a higher-than-average income
must fully recognize the importance of effective retirement planning and
disciplined saving habits in order to ensure a comfortable retirement

Read the entire article

The planning onus is on above-average earners when it comes to replacing
employment income in retirement.  In an investing environment where
do-it-yourself strategies such as robo-advisors and passive ETF portfolios
are becoming more and more prevalent, it is crucial that this message is
heard.

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