Comments on: Fidelity Says You Need 80% Pre-Retirement Income in Retirement (just don’t use them to get you there)

By: George

George — Fri, 26 Oct 2007 03:31:04 +0000

I use Quicken to keep track of my finances, and I’ve created a report that I call my “estimated retirement expenses”. It’s a tally of all of our expenses over the past 12 months, minus the ones that won’t exist when we’ll be retired (day care expenses, mortgage payments, etc). This gives me a rough idea of how much after-tax income will be necessary to maintain our standard of living in retirement. It doesn’t account for increased expenses in retirement, such as travel or medical care, but it provides a really good baseline to work with, and it provides me with a personal estimate of the “replacement ratio” that will apply to me.

The expenses in the above report represent about 35% of our household gross income, or about 45% of our current take-home pay. Even adding in a healthy margin for travel and medical expenses, our “replacement ratio” shouldn’t exceed 55% - far from the 80% recommended by Fidelity.

By: Y HAT

Y HAT — Fri, 26 Oct 2007 02:24:43 +0000

George and CC make an excellent point with regards to expenses.

I imagine that your average Joe’s biggest monthly expense is housing, which tends to take up about 30% of income. If you manages to pay off your mortgage by age of retirement, you only need to save enough to cover the remaining 70% of your pre-retirement income. If we start considering the other factors George highlighted, one quickly sees that Fidelity’s estimate is somewhat inflated - which shouldn’t surprise us, given that the more we save, the more money Fidelity makes.

By: Paul Petillo

Paul Petillo — Thu, 25 Oct 2007 15:33:39 +0000

There is no dispute that some percentage is the right one for someone. But putting an exact number can be incredibly difficult. I submitted a post today about an often under-considered part of any retirement plan: your health. No doubt, this is the easiest to control aspect of your retirement plan and the most overlooked. It is the one place where taking the most conservative risk is the best investment.

By: Canadian Capitalist

Canadian Capitalist — Thu, 25 Oct 2007 14:21:19 +0000

George: You’re absolutely right. It’s not just the working expenses. In retirement, some of life’s major expenses such as mortgage payments, daycare/childcare expenses etc. also goes down. And yes, how much we spend is all that matters and we need enough savings to cover that.

Dave: Expenses are one enemy of the investor. The other is emotions. Arguably, investors lose more to chasing returns, panic selling etc. So, we have to keep expenses and emotions in check to earn close to market returns.

By: George

George — Thu, 25 Oct 2007 12:28:14 +0000

There are two things everybody seems to overlook in these “replacement ratio” debates:

1) There is a huge difference between your gross and net pre-retirement income. There are many things deducted from the paycheques of working Canadians that retirees simply don’t have to pay (i.e. CPP, EI, union dues, pension plan contributions, professional dues etc). Those costs can easily eat up around 10% (or more) of gross income. When you’re retired, these costs are gone, so your gross income can be that much lower with absolutely no change in disposable income or lifestyle.

2) Income doesn’t matter. At all. Expenses matter. If you know what your expenses are, and what you want them to be in retirement, it’s pretty easy to calculate how much you’ll need. If you want to live the “high life” in retirement, your expenses will be that much higher. Most people when they retire, though, live a lifestyle very similar to the one they lived while working.