Canadian Capitalist recently had an article discussing the “smoke & mirrors” guy’s “Myth 1: If I had a $1,000,000… I Could Retire”. I hate guys like Mr. Trahair who rant about the financial services industry and their “vested self-interest in telling people they need more” and flame about how the banks try to scare people into putting more money away for retirement. All the while ignoring the fact that the individual also has a vested self-interest in saving for retirement. It’s the stupidest reason to not invest as much as possible that I have ever heard. It’s like taking a lower salary so you can receive the GST credit.
He talks about how once you retire your expenses are much lower because you will hopefully no longer have a mortgage to pay down, no more kids’ education to pay for, etc… So what? Your expenses could go up too if you want to travel more than before you retired. You could go out for dinner more. You might want to go buy a dream house, buy a cottage, a boat, hire a maid when you are 60, hire someone to help you out when you have a stroke at the age of 70, etc… But no, Mr. Trahir tries to explain how you’ll be just fine with 40% of what you made in your 40s.
The question of how much you need when you retire is irrelevant (if you can easily satisfy your needs). The question is how much do you want? For most people, the more the better. Of course you need money now too, but no one will instinctively starve themselves now to have more money later. Nor will you ever starve yourself now by putting away too much for later. You can always take money out of later if you need it now. One thing I don’t need is Mr. Trahair telling me that I can “get by” on only 30% of my current income in retirement. I’d rather have some balance between now and later. Maybe do some travelling and enjoy the money when I am older on a boat or a condo at Whistler or on Vancouver Island. Not scrape by on 30% of my current income.
It seems his only reason in debunking this “myth” is to “start relaxing a bit.” I think saving up more for retirement than I would actually “need” is a perfect way to “relax a bit.” The stock market and/or interest rates might go through a bad slump and your investments won’t compound as much a your thought/predicted they would. Targetting 100% of your present income (in tomorrow’s dollars) in retirement is playing is safe.
The Canadian Capitalist adds “of course, those planning an early retirement need a larger nest egg.” Another perfectly good argument for saving as much as you can. The more you save, the earlier you can retire.
Smoke and mirrors “is a metaphor for a deceptive, fraudulent or insubstantial explanation or description.” Describes Mr. Trahair very well.
19 thoughts on “Debunking David Trahair’s Smoke & Mirrors: Myth #1”
As I stated at CC’s blog, I think it all comes down to doing an assessment of what you want to be doing in retirement (and for how long) to determine your required nest egg. Percentage of income estimates are rather meaningless.
I haven’t read Mr. Trahair’s book so I can’t comment on its validity, but I will state that many advisors I know help with debt consolidation to reduce the debt burden of their clients. Naturally, this is in their self interest (less interest payments = more for mutual funds and the like), but nonetheless this is something that I think is beneficial for many people who have high interest debt. It can still make sense to save for RRSP’s while paying down debt, but it depends on your average weighted cost of debt.
I just don’t buy the argument that you should even think too hard about what you want to be doing in retirement (and for how long). Plan for the worst case: that you will want/need at least as much income as you are getting right now. Mr. Trahair seems to think it’s crazy if an advisor suggests you plan for needing/wanting 100% of your current income when you retire and suggest that they don’t mean well, but that they just want your fees. That’s backwards; Mr. Trahair should instead be telling people to choose advisors better, or to scrap their advisor, or to invest for themselves with a low-cost DIY E*Trade account…not telling them to save less.
Dave, you have to stop waffling and tell us how you really feel! haha.
But seriously I’m going to have to respectfully completely disagree with you.
With respect to your point that you don’t like guys like Trahair telling you how much to save…I don’t think that’s what he is trying to do. He’s trying to tell people to analyse their various retirement sources of income, compare that amount to what they spend now on items that they will still need in retirement in order to see how they will be doing in retirement and see if changes are necessary. You sound like a guy who is has his finances in order, knows what he wants financially and how to get it, and has the time to make it happen. Unfortunately people like you are the minority. There is a significant percentage of the population that gets it’s financial education from a combination of billboard posters and commissioned salesmen. Those people are the ones who need to read books like this in order to get the skills to evaluate their situation.
As far as how much to save, I think that if most people planned a retirement that provided them with 100% of the income they had when they were working, they would have to work until they were 75 and then they would be far richer than when they were working. If that’s what the goal is then that’s fine but most people would rather have some better balance between their working/retirement financial situations. In my case when I strip out my rrsp contributions and sizable mortgage payments from my current income, factor in income splitting, then I end up needing only about 50% of my current income in retirement and we will have quite a bit more extra money to spend than we do now. Obviously I’m only one scenario and we all have different goals which is why it’s important to learn how to analyse your own situation or perhaps go to a fee-only advisor for help.
Now that I think about it, some books like Swim with the Sharks do try to tell you how much you need to retire but in those cases they are talking about retiring as early as possible and their advice is based on the premise that retiring early is more important than a luxurious retirement lifestyle.
I disagree that 100% of my current income is a worst case scenario. I’m in my mid twenties: my income will double or (if I’m successful) quadruple between now and any reasonable time frame for retirement. A ‘worst’ (ie. expensive) case would be I want to buy a villa somewhere in the Azores islands, or better yet, by a whole island.
I think it’s important to realistically think about what you want to do, when and for how long. It’s way more accurate and helpful than to assume that whatever stage of life you’re at now is a good guide for what you’re going to be doing in the future. I don’t think you need to fixate on it, just use it as a template to get a feel for how much you need to have when you’re ready to retire (whenever that is). Life changes all the time and so does your goals and dreams. Spending a little time to figure out what that means financially periodically seems sensible to me.
By the way, good debate.
Investoid: I didn’t intentionally put much thought into the words I used when I said “current income”. But yes, you are right when you imply that a worser case would be the 100% of the salary you are earning when you retire (in tomorrow’s dollars). I agree it’s important to, as you say, “think about what you want to do, when and for how long.” And, as you say, not to fixate on it, and that life changes all the time. Which is why I advocate playing it safe and saving more than you think you might need, or plan for the worst case, whatever way you want to think about it. It’s a lot easier to start contributing less to an RRSP as you get older, but much harder to make your savings catch up (after following Trahair’s advice).
Mike said: “There is a significant percentage of the population that gets it’s financial education from a combination of billboard posters and commissioned salesmen.”
Sure, but if the billboards and commissioned salesmen you are referring to are recommending that we put away enough money for retirement such that our retirement income can be 80-100% of our working income, then I don’t see the big crime in that. I just think Trahair (and others as well) is picking the wrong battle here.
Mike said: “I think that if most people planned a retirement that provided them with 100% of the income they had when they were working, they would have to work until they were 75”
That’s because most people start too late. Saving up for retirement is always daunting when you start too late into adulthood. And always easy if you start early. It’s amazing how many late 20 somethings I know that have no RRSPs (none has a pension that will take care of them completely).
Mike said: “most people would rather have some better balance between their working/retirement financial situations”
Agreed. But obviously if you’re not enjoying life while you’re working or your family doesn’t have enough money to put food on the table you have to cut a cash outflow. Cutting needless expenses should come first, then the RRSP/investment contributions will have to be cut at some point. No one is saying that one should give up one’s current lifestyle or quality of life. Giving up your current lifestyle (to the point that you are unhappy) is not smart. But nor is giving up your future lifestyle for the sake of your current lifestyle. The question is how much will you need for your future lifestyle? I’m just saying to plan for the worst. You can always take money out of your retirement savings early if you have to (ie. if your current lifestyle is suffering).
While I agree that it makes sense to plan for the “worst case scenario”, I think that Dave is leaving a rather harsh impression.
There are a couple of facts that hopefully can clarify things:
Fact No. 1: The vast majority of retired people maintain the same lifestyle that they had before retirement. This isn’t because of financial limitations – it’s because they like the way they’ve set up their life, and they want to continue doing so in retirement. This is also the reason that many retired people seek out some form of “work” in retirement, be it a part-time job or volunteering. It’s so they can maintain the social connections that they valued from their working life.
Fact No. 2: After retirement, you don’t need 100% of your gross pre-retirement salary to have 100% of your pre-retirement take-home pay. After you retire, you won’t be contributing to CPP or EI, and you won’t be contributing to a pension plan or RRSP. On top of that, your work-related expenses (commuting, clothing, etc) will be eliminated. This is where the “70%” number often comes from — If you have 70% of your pre-retirement gross income after retirement, your “take-home pay” will roughly equate what it was before you retired.
If you want to plan for a “worst case scenario” (i.e. having the same or better lifestyle after retirement), you need to figure out how much money you’re spending in your pre-retirement years (say your 40s and 50s), and ensure that you’ll have enough “take-home pay” in retirement to cover those expenses, plus a bit of cushion room.
I’m lucky enough to have an excellent defined-benefit pension plan and I’ve maxed out my RRSPs. I’m putting extra money into the mortgage, and am targeting having it paid off by the time I hit age 40. If all goes well, retirement at around age 50 will be very feasible, even factoring for extra vacations and such.
All this talk about percentages of income makes me wonder if we’re talking about the same things. In my case I’m almost 40 and have established my career to the point that I’m pretty confident my income won’t change much (adjusted for inflation) so it’s pretty easy for me to look at my current costs, spending, goals etc and figure out what I want for retirement. As it turns out that ends up being about 50% of my current income. It sounds like Investoid (and maybe Dave?) is much younger, still doing the career advance thing which means that any talk of % of income is meaningless.
I’d have to agree with David Trahair on this one. While investing early as Dave indicates, will provide a sizeable retirement income, and the financial discipline will aide you in many avenues of life, planning your retirement lifestyle when you have yet to reach 30 is a little premature. Life can toss so very many twists in the road.
Have a look around, and see what the AVERAGE retiree is doing. Most, as George stated, are doing similar things in retirement as before. They are often finding ways to do more of the enjoyable pursuits, and fewer of those less-so. Wise ones do not suddenly spend huge amounts of money on some un-tested adventure. MOST retirees wish to live a comfortable life. Few that I know would be any more satisfied if their income doubled.
Look at your general health. As we age, we slow down. Being just shy of 50, I now have a much better appreciation of my parents difficulty in keeping up to we kids during our teenage years! Also note the sports in which many retirees engage. Few still play shinny hockey, soccer or football, although they likely did in their 20’s abnd 30’s. In addition, unless he lives in a bubble, he has 30 or more years of opportunity to acquire a debilitating injury, that may impact his ability to engage in his continued lifestyle, and his expected retirement. Also don’t forget that his generation is the first that has a shorter life expectancy that their parents.
Don’t forget the other bumps in the road that life can toss you. As a recently married couple, Dave & his spouse have less than a 50% expectation of still being married to each other at retirement. He will likely experience at least two, possibly 3 major upsets in the economy. Hopefully he will experience the joy of raising children.
Have you noticed the disappearance of the “Freedon 55” advertising? Most of the PF blogs I see still propose retiring early, but the industry no longer seems to. Has their target changed? They’ve now captured Dave’s part of the market, and are now in a different mode, and targeting a different population!
Take the time to enjoy life. Don’t forget to plan for the future, but also don’t forget that the further away that future may be, the harder it is to predict. For those who are bombarded by the advertising that occurs at this time of year, the fact that they WILL be able to continue to have a comfortable life, even if they haven’t a few million stashed away, will provide some level of reassurance that they won’t be homeless and starving, or working at McDonalds until they’re carried out in a box, as some recent advertising has suggested
Good comment David. I took the time to check out Dave’s “About Me” and had to laugh when I read that he is a programmer and was married in 2005…that would be my bio as well.
There seems to be a lot of tech geeks in the PF world.
This is a great debate! Thanks for the post Dave.
I have to agree in general term that there is no fixed % of your current income that works for everyone. It has to do with what you want.
For example, I like the way I live right now and it isn’t costly. If I assume I’ve paid off my mortgage in retirement I could live off of $22,000 after taxes, so if I add in $3000/year in travel. I can retire off of $25,000/year. So people might assume I’m nuts for that amount, but its how you live your life.
Dave: I think you are a bit too harsh on David Trahair. Recent academic research on spending patterns does show that most people tend to spend less not more in retirement. Why is it okay for the financial industry whose paycheck depends on it to trot out incorrect numbers but wrong for DT to say it is not correct?
I also disagree that your needs are irrelevant. Our needs are finite and can be planned for. Our wants are not. If you keep planning for everything you could ever want thirty years down the line, you’d never retire. BTW, what makes you think that a modest, frugal person is going to live lavishly in retirement? As we get older we tend to become set in our ways and most people are going to live in pretty much the same lifestyle they were accustomed to in their working years.
I realize that this may not apply to everyone but it does apply to most people. For people who are 55 or older, who can count on OAS and CPP to fund part of their retirement, it is easy to agree with DT that you don’t need all that much in your RRSP.
CC: “Recent academic research on spending patterns does show that most people tend to spend less not more in retirement.”
But is this due to the fact their expenses went down independent of their income decreasing? I’d like to see such a study. The following is also true: “research on spending patterns does show that most people tend to spend less not more when they have less money.” And so is the following: “research on income patterns does show that most people tend to earn less not more when they retire.”
I didn’t say needs are irrelevant. I said (in brackets in my original post) that they are irrelevant if “you can easily satisfy your needs.” I probably explained this wrong (as usual), but what I meant was that for me needs in retirement are irrelevant because I don’t want to just satisfy my needs in retirement but I want to satisfy some needs and wants. Needs are the 30% that Trahair talks about. Double or triple that up to 60-90% of pre-retirement income and you’ve got your needs (diapers and food) covered and some money for wants. So I look at how much total do I want in retirement, not how much do I need to scrape by. That’s sort of why I think Trahair’s myth #1 is a bit of a moot point since who wants to just up the minimum?
I might get back to some other comments later this week but not sure because I’m rather busy this week. I’m thinking of starting an “on notice” and a “dead to me” list (a la Colbert). To add some humour to my habit of bashing various people, so people won’t take me too seriously when I am “too harsh” on person X. 🙂
George: I like your comment. Fact #1 seems reasonable to me. I’m of the opinion that most people maintain (or rather, would like to maintain) their pre-retirement income, as I’ve said. But what about my harsh impression? What specifically was too harsh and why?
Canadian Dream, thanks for the comment.
“I have to agree in general term that there is no fixed % of your current income that works for everyone. It has to do with what you want.”
I think the main part that was too harsh was your comment about expenses decreasing in retirement – extra travel and other “luxury” expenses in retirement aren’t usually going to exceed the savings from not needing to do a lot of the things that people do in their working years (i.e. support children, pay down a mortgage, and save for retirement).
If you’ve eliminated all of your debts when you retire, and your children are grown and on their own, your post-retirement expenses are likely to drop greatly from their pre-retirement peaks, even factoring for traveling more and doing other “fun” things.
I take your point, however, and I’m in the same camp regarding retirement savings – I save as much as I possibly can for retirement, not because I fear being forced to eat dog food when I retire, but because I want the flexibility to choose to retire early. Having a good pension combined with a large RRSP account will give me that flexibility.
Trahair’s point is that you don’t NEED to save every possible penny, because your expenses in retirement are likely to be lower than you think they’ll be.
George, I agree, Trahair’s point is that you don’t NEED as much as one might think and so you can “relax a bit,” as he says. He just comes across as wanting people to save just minimum that they will NEED just because he hates the banks and/or full brokerage houses.
In your first sentence did you mean to say “your comment about expenses INCREASING in retirement”? Because I think I’ve been talking about expenses increasing (or rather, not significantly decreasing).
I think we are arguing about the wrong thing here. I don’t think we can really answer the question “will my/your/one’s expenses decrease in retirement.” I think people spend based on what they earn. That is probably especially true in retirement when you are closer to the end of your life (less long-term planning required). The right questions are “how much income do I need in retirement” and “how much do I want.” Those questions have also been asked and answered in this discussion but I think the question “will my/your/one’s expenses decrease in retirement” just doesn’t make sense. Unless you want to talk about “necessary expenses.” And there’s no doubt those will decrease. But you were referring to total expenses dropping in retirement (including “fun things” as you said). Everybody is different I guess, but if you won the lottery in retirement you would spend it (unless you became mentally ill). Same thing if your income somehow increased post-retirement. You’d find a way to spend it. I (or rather a grandparent of mine who re-married post-retirement) can speak from personal experience on that one.
Great points though…I also save as much as I can to have the flexibility to retire late with more or retire early with less.
What a great discussion this has been! I’ve learned a lot here.
Yes, I did mean to say that I was addressing your point about expenses increasing in retirement. And that, I think, is where we disagree. I think that most expenses will decrease in retirement.
I know several people that are currently retired, who have comfortable incomes (typically around 50-70% of what they earned while working). None of them seems to have any meeting their needs. What I do find interesting, though, is that many of their ‘wants’ are fairly easily satisfied.
In your working life, a lot of your disposable income goes toward ‘wants’. Such things might include traveling, buying a big-screen TV and other gizmos, and so on. Obviously the types of wants will vary by individual. By the time somebody has retired, they usually have acquired all of the “stuff” that they would want. Accordingly, most retired people (in my limited experience, at least), spend a lot less money on purchasing things beyond day-to-day necessities.
Even then, though, the expenses typically go down – most retired people I’ve met have extremely small appetites. There’s a reason that “seniors menus” usually have smaller portions – it’s because most seniors have no desire (or ability, in many cases) to eat a huge portion of food. Thus, food expenses go down in retirement.
Some other categories of expenses often go down in retirement as well. Housing, for example. Many retired people find large houses to be too much for them, so they downsize. This reduces property taxes, utility expenses, and so on. It can also eliminate a mortgage if one is still owing on their larger “family home”.
The one category that is likely to get more money in retirement is travel, but even then I don’t think the effect is as significant as you might think. With no time limitations, retired people are free to travel last-minute, or during the “low” season. In either case, it’s much easier to travel for far less than a standard working stiff, which partially offsets the fact that the individual might be traveling more often.
I’m sure there are individual differences, but I think my point is clear: on the whole, expenses will go down in retirement. While I think saving for retirement is definitely an important thing to do, it shouldn’t be done “at all costs”, meaning significantly sacrificing your standard of living while you’re young, healthy, and able.