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Want to play in retirement? Test your future income

A retirement proverb brought to you by the mutual fund company Fidelity Investments: If you want to play tomorrow, you have to pay today.

Fidelity is to issue a press release today based on some research suggesting that people aren't saving nearly enough to allow them to maintain their current lifestyle after leaving the work force. The subtext here is, naturally, that we should all be buying more mutual funds, preferably those sold by Fidelity.

The correct formula, according to Fidelity, is to put enough away so that your retirement savings, government programs and company pension (if you have one) provide you with about 80 cents in after-tax retirement income for every $1 you netted before retirement. The reality, according to a Fidelity survey of 2,200 people aged 25 and older, is that Canadians on average have saved enough to generate only 50 cents in retirement income per dollar earned while working.

"The savings of Canadians for retirement is not adequate," said Peter Drake, vice-president of economic and retirement research at Fidelity Investments Canada. "A 50-per-cent pay cut means, for most people, a very Spartan retirement and, I would think, a very disappointing retirement."

Financial planners often estimate that people need to replace 70 per cent of their preretirement income, but some experts believe the so-called replacement ratio could be as low as 50 or 60 per cent for certain individuals. Fidelity has set out a substantially higher threshold because it sees retirees needing more money after they leave the work force.

Part of this relates to people living longer and, in some cases, retiring earlier. But Mr. Drake said Fidelity has found another aspect to the story, which is that people are leading more active lives in retirement. "All of this adds up to some very strong anecdotal evidence that the notion of downsizing in retirement is way less relevant than it might have been 20 or 30 years ago."

If Fidelity's survey results start a debate at your house about the kind of life you want to lead after retirement, then they'll have performed a great service. But don't take that 80-per-cent number at face value.

Fidelity has provided a nifty little online retirement savings calculator at I took the challenge and found out, first, that I'll need $2.1-million in retirement savings to replace 80 per cent of my current income and, second, that I need to save more than I am right now to reach that savings goal. But here's the thing - it's hard to see much similarity between my financial situation now and what it will be in retirement.

Fidelity's retirement savings analysis does acknowledge that individuals no longer need to pay into their registered retirement savings plans once they're done with work. But no allowance was made for the fact that most people retire with their mortgages paid off, nor was there a nod to the financial implications of having kids.

Like most parents, my wife and I are juggling RRSPs with registered educations savings plans. We're also paying big amounts for various sports, lessons and activities for our two boys, aged 10 and 13, not to mention ever-rising grocery bills. Call me naive, but I expect these expenses to be largely gone by the time I hit age 65 in 20-odd years.

Anyone else out there in the position of not force-feeding every possible dollar into their retirement savings because they have kids (and, let's be frank, a life that doesn't entirely revolve around sacrifices for the future)?

If so, then you have some decisions to make. You can work past age 65 on either a part- or full-time basis, you can plan to spend less in retirement or you can save more while you're working. Remember that saving more becomes easier as you get your mortgage paid off and your kids grow up and leave home.

This is borne out by Fidelity's finding in its survey that people 55 and older were in a position to replace 59 per cent of their preretirement income on average. That's still well short of the 80-per-cent level, but it does reflect the fact that people get more serious about saving for retirement when they get closer to leaving the work force.

Fidelity asked people why they weren't contributing more to registered retirement savings plans and the answers ranged from the need to save for a home to high taxes and high debt loads. If big debts are your excuse, then you need to reflect on the fact that a live-for-today philosophy is as suspect as the save-everything-for-tomorrow ethos.

Somewhere between the two extremes you'll find your own retirement savings equilibrium. Fidelity's tough stance on paying today to play tomorrow won't fit everybody, but it's a good conversation starter.


How we save

The mutual fund company Fidelity Investments commissioned a survey last February in which 2,200 people aged 25 and older discussed their retirement savings readiness. Fidelity suggests people save enough to replace 80 per cent of their preretirement income once they leave the work force. Here's how people across the country stand.

Other countries

United States: 58%

Britain: 50%

Germany; 56%

Japan: 47%

Recommended: 80%


British Columbia: 47%

Alberta: 45%

Prairies: 52%

Ontario: 50%

Quebec: 53%

Atlantic: 52%


© 2007 The Globe and Mail. All rights reserved.

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