FIGURING OUT YOUR WORK/LIFE BALANCE

How long do you need to work if you haven’t saved enough? Fred Vettese explains.

In my book, The Essential Retirement Guide, I explain why future investment returns will probably remain low for decades to come. A typical middle-income household without a workplace pension plan will need to save 10 to 12 per cent of pay a year for 30 years to retire comfortably at age 65. That savings rate would need to be higher yet for higher-income households or if one skips a few years of saving.

That said, I doubt that people will suddenly start saving a lot more. This is not how we are wired and besides, there are too many pressing claims on our precious disposable income today.

It is far more likely that we will continue to live our lives the way we have always done, salting away a few dollars when we can and hoping for the best. When retirement looms large, we will then reassess how much we still need to retire well and, if necessary, we’ll keep working. That, at least, seems to be the plan based on virtually every recent survey conducted by the big six banks.

But just how much longer do you need to work if you haven’t saved enough? It is encouraging to find that deferring your retirement age to improve your retirement prospects can be such an effective tool, especially at lower income levels. For example, a person with slightly above average income might need $400,000 in savings to retire comfortably at age 64, (this wealth target can be estimated using the wealth target calculator at morneaushepell.com/wealthtarget). If this individual wants to retire at age 58 instead, the target rises to about $620,000. At the other end of the spectrum, postponing retirement until 70 reduces the amount needed to a mere $90,000. The difference in required savings between age 58 and 70 is almost seven-fold!

While varying retirement age can help to get one’s retirement planning back on track, it is dangerous to rely on it too heavily.

For one thing, we tend to overestimate when we will actually retire. A survey by the Society of Actuaries shows that the age when people actually retire is seven years earlier than the age when people who are still working expect to retire! The low interest rate environment is too new a phenomenon to account for such a big discrepancy. The real reasons for the seven-year gap are that (a) employers tend to push their employees out of the workforce early, and (b) health problems force many workers to retire earlier. Either way, the moral is that you are not in as much control of your life as you might think. If you don’t save when you are young, you may not have the chance to do so in the latter part of your career.

Another reason not to postpone retirement too long is that you might regret it. In a 2006 Statistics Canada survey, seniors were asked if they enjoy life more, the same or less after retirement. About half enjoy life the same, and most of the other half said they enjoy life more. Only one retiree in nine admitted to enjoying life less, an impressively low figure given how many workers were pushed out of their jobs before they were mentally or financially ready.

If you are planning on retiring in your early 60s, you might well have a quarter century or more of life ahead of you, but the odds are you have only 10 years or so of disability-free life remaining. How much do you want to cut into that precious period by continuing to work?