I received a copy of the research report by the Canadian Institute of Actuaries (thanks to Riscario Insider for the link) that estimated how much Canadians in their early to mid-40s need to save for retirement. They estimate this number by assuming that a senior one-person household would spend the same average $24,909 it did in 2003 (adjusted for inflation) and a retired couple would spend $43,717 on basic living expenses (food, shelter, clothing, transportation, health care, energy and taxes). After accounting for how much of these expenses will be covered by OAS, CPP/QPP, the authors calculate how much of the shortfall must be supplied by a combination of retirement savings and home equity. The authors conclude that a single person earning $40,000 needs to save 14% to 20% of annual earnings to cover non-discretionary expenses in retirement (not including home equity). A couple with a combined annual income of $80,000 need to save 12% to 18% of their earnings.
As with any study of this nature, the conclusions are very sensitive to what assumptions are made. I think two key assumptions made in the study are questionable:
- According to actuary Malcolm Hamilton (who based his conclusions based on a 1997 survey), the median retired senior couple needs $24,700 for all spending, not just necessary expenses. Fully retired unattached seniors need only $15,000. His estimates are significantly less than the assumptions made in this study.
- The study assumes that retirement portfolios will generate the same returns as Government of Canada bonds adjusted for various inflation assumptions. The return assumptions are far too conservative for a fully diversified, low-cost portfolio with a significant exposure to equities suitable for an investor with a 25-year+ time frame.