70% is a rule of thumb and while it lacks specifics as to the reasons it works, it might. However, it is a poor way to think about how much retirement income you could need.
No one spends income, they spend cash. As an example, take your spending now. What share of your income is consumed. Consumption is the amount that defines your lifestyle. Take your total income for the year and deduct taxes, government-mandated plans, union dues, pension plan deductions, savings, mortgage payments, and childcare and you will have an approximation of what you consume. Consumption defines lifestyle. All of those other things are not enduring consumption. There are temporary or move money in time. Savings for the future debt payments for the past.
TConsmption is the part you must replace. Is it more than 45% of total income? Maybe. The higher your income the less likely it will be more, even though we think higher-income people should have a higher spending ratio. They don’t. Taxes eat a huge share and so do savings to replace their income. A doctor making 250,000 has $120,000 left once taxes, Canada Pension and a pension contribution to an RRSP are deducted. y still have debt payments, childcare and savings to go. If income goes higher, they lose 53.5% to income taxes.
You need to understand how much you want to spend in retirement. Suppose you said the same as I do now, but the costs for mortgage payments, pensions, savings, childcare, and other child costs, will go away and some, maybe all, of it will be replaced by recreation and travel.
Because taxes are manageable and their structure is different as a senior citizen.
Did you know a couple could have income together of $47,000 before they paid any income tax at all? If both have been working and are entitled to Old Age Security and CPP, $40,000 or more of that is available and loosely tied to inflation. If they want to spend more, that’s on them to create. Could be employer pensions, an RRSP, or other savings. What remains then will be supplied from after-tax income. For the next $25,000 each taxes are about 20% and beyond that about 30% up to An additional $30,000.
If someone wants a lifestyle of $7,000 a month, $84,000, they will find the additional money will cost taxes and the total should be about $37,000 divided by 80% (the income keep rate) so they will need about $37,000/.8 = $46,000 of taxable income.
Here’s a summary if the arithmetic puts you off. $40,000 happens with government plans. Another $7,000 or so (47,000 – 40,000) is free of tax, meaning $46,000 will be taxable. So total income wants to be about $93,000, or $46,500 each. If you have $93,000 of income in retirement as a couple, your disposable income share will be about $84,000, 90% of income, and that is far higher than it is before age 65.
If your lifestyle spending now is $7,000 a month, you likely need income of $190,000 to support it.
Some investment income can be earned without tax using a tax-free savings account. TFSA.
Inflation is a serious consideration and can be calculated too. It increases the amount of income needed at retirement but it also increases income to provide savings along the way. If you think of required savings as a percentage share of income, it is not such a formidable obstacle.
People who have retired are not always susceptible to CPI changes. They gradually reduce their lifestyle as their interests and health alter their needs.
If you expect to travel be a little aware of how the Canadian dollar behaves compared to the currencies you will need where you go.
Healthcare can be an issue after retirement.
When you think about lifestyle spending in retirement instead of income requirement, you get materially different answers.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
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