Retirees need only 60% of working income, Russell survey finds
According to a Harris/Decima poll of 2,200 Canadian commissioned by Russell Investments Canada Ltd., currently retired people say they need only 60% of the income generated when they were working — a stark contrast to a similar survey a year ago from Fidelity Investments Canada which found 80% or even higher "replacement ratios" might be necessary.
The Russell finding is closer to the 50 or 60% replacement ratio that actuary Malcolm Hamilton has often cited, and for similar reasons: "Certain living expenses tend to drop significantly during retirement as most retirees are mortgage-free and no longer incur employment costs such as daily transportation,” says Irshaad Ahmad, president and managing director for Russell Canada, “However, for a comfortable retirement, retirees should still plan for lifestyle expenses related to travel, hobbies, and entertainment by seeking investment solutions that still have growth potential. Just because you are retired, doesn’t mean your portfolio has to.” It also found that income requirements stay relatively constant throughout retirement. Relatively few retirees downsize their homes and "it does not appear that retirement income requirements decline over time."
Furthermore, while retirees draw income from multiple sources, only 27% of them cite part-time work: well below the 68% that pre-retirees expect. Among the few that do keep working at least part-time in retirement, only 23% do so out of financial necessity. Ahmad says the research should help replace the "potentially paralyzing fear of retirement as a financial threat with a realistic, fact-based sense of optimism."
Indeed, despite the market volatility of the past year, 88% of those already retired rate their financial health to be somewhere between "good" and "excellent."
Ten years before retirement, 40% of Canadians felt anxious about having enough money to live on after their working years. But when they actually reach their retirement date, the percentage that are anxious falls to just 27%. And once they actually start living out their retirement dreams, the percentage that are anxious during the first three to five years of retirement falls to just 10%. "Despite the perception of doom and gloom by pre-retirees when it comes to their financial futures, the reality is that everything is going to be alright – with the right investments, advice, and planning," says Harris/Decima senior vice president Bob Murphy.
The poll was conducted between January 25th, 2008 and February 9, 2008, well before the multiple disasters involving American financial institutions ranging from Bear Stearns to Lehman Brothers. Survey respondents were 42 years old or more and had household incomes of at least $50,000. Roughly half were retired and half still working.
The mix of income sources in retirement will however be different for those still approaching retirement. While 64% of Canadians who are 70 or older receive income from a Defined Benefit pension plan, only 44% of re-retirees aged 42 to 49 expect to receive DB pension benefits. The biggest income source is government pension plans, cited by 95% of those who are already retired and 93% of those still working. The second largest source is income from retirement savings (RRSPs etc.) and non-registered investments: cited by 86% of retirees and 84% of pre-retirees.
For more, see here.
Photo: Irshaad Ahmad, courtesy Russell Canada
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