How much retirement income do you really need?

Determining how much income you’ll need in retirement has always been difficult, and it’s still common to rely on rules of thumb. Perhaps the most popular says retirees should plan to live on 70% of the income they earned while working. But in his recent book, The Real Retirement (co-authored by Bill Morneau), actuary Fred Vettese argues many Canadians will likely need much less.

In fact, pension experts like Malcolm Hamilton—the closest any actuary will come to being a media superstar—have been challenging the 70% figure for years. Now Vettese has introduced an idea he calls the neutral retirement income target (NRIT) to improve that estimate.

The goal of the NRIT is to determine how much of your current income goes to day-to-day consumption, and then to estimate the retirement income you’ll need to meet that same level of spending. Vettese found that in many cases, retirees could enjoy the same level of consumption on less than half of their pre-retirement income. Not only do retirees have significantly lower expenses—assuming they’ve paid off their mortgage and the kids have moved out—but they also enjoy an array of tax benefits that working people do not.

Here’s an example using a couple with a total income of $110,000. Vettese assumes the couple contribute 3.8% of their income to RRSPs, spend $1,100 a month on child-rearing and have monthly mortgage payments of $1,633. Once you deduct income taxes and payroll taxes (CPP and EI premiums), this couple is left with $46,600 to spend.

After retirement, the couple would no longer be contributing to an RRSP, incurring child-rearing expenses or paying down a mortgage. They would pay no payroll taxes, and they’d pay dramatically lower income taxes thanks to the pension credit, age credit and income splitting. As a result, they’d need an income of just $48,300 to fund the same level of consumption they enjoyed while working. That’s 44% of their pre-retirement income.

There’s no question that many Canadians will have different circumstances than this fictional couple, and the specifics matter a lot. But Vettese also includes examples for folks with higher and lower income, no children and no spouse. The NRIT in each example is different, but it’s usually in the ballpark of 50%.

Given that many Canadians are carrying too much debt and socking away next to nothing, no one wants to tell people to save less money. But it’s important to help people plan their retirement with realistic expectations. Vettese makes a compelling case that families who are paying off their homes and saving modestly are likely to do just fine.