Is 10% the new 6%?

essential retirement

Part of the plan to retire well that I’ve been espousing on this blog is to save 6% of your income each and every year of work between the ages of 25 and 65. This advice came from actuaries who studied the spending habits of Canadians during their working and retirement years. The 6% figure, it was concluded, meant that Canadians could save enough for retirement to maintain the lifestyle they had become accustomed to while working a raising family.

The 2 chief actuaries who came up with this number, working independently, are Fred Vettese and Malcolm Hamiliton. Recently Fred Vettese wrote a follow up book to his The Real Retirement, this time called The Essential Retirement Guide. I just finished reading the book and I’d like to provide a summary of the key points that you may find interesting.

First, and probably most suprising, Fred seems to be moving away from his belief that saving 6% of your income would be enough to ensure a comfortable retirement at age 65. The primary reason for this is his forecast that stock and bond returns will be lower in the next 25 years due to demographics trends. Basically, an aging population worldwide will reduce economic growth which will, in turn, reduce stock market returns.

An aging population will also crave the relative security of high quality bonds which will further reduce bond returns as more investors seek them out. Based on this forecast, he believes a 10% savings rate would be safer to protect retirees from the potential to run out of money.

So what are readers supposed to do? Save 6%, 10% or some other amount. My take on this is simple.

First off, remember that Marcolm Hamilton still recommends 6%.

Second point, know thyself. If you are more of a worrier than average, then boost your percentage to 8% or 10%. If you are more concerned about living for today, keep it at 6%. We’ll call this the chicken index. The more of a chicken you are, the more you save.

Remember Fred is making a long term prediction on stock and bond performance that is different from the past. In this way, he is saying “this time it’s different”. He may be correct, but we should all know by now how hard it is to predict the future.

In any case, deciding on 6% or 10% is like icing on the cake. Bake the cake first, by setting aside your percentage every month in low cost index funds, keep yourself valuable to you employer or your customers. Then you can worry about the icing. The important thing is you won’t starve.

The other interesting part of the book deals with his writing about risks of illness as you age, as well as the potential need for long term medical care, either in your home or a long term care facililty. To be honest, I found this section of the book quite depressing, but ultimately necessary to contemplate. Fred wrote quite frankly about his relatively minor health issues (he was 63 years old when he wrote the book), his fitness and lifestyle regiment to reduce the risk of illness, and his experience watching his parents age. There is lots of good advice on how we can all improve our chances of living longer without suffering a major illness and keeping up our spirits along the way. Much of the advice would not be new to anyone who keeps up to date on healthy lifestyle recommendations, but he did provide some solid information on the percentage risks associated with certain lifestyle choices (smoking, drinking excessive alcohol, etc.).

He also spend some time discussing the benefits of annuities and how they need to be marketed better because they really are a valuable product that could greatly reduce the stress retirees may have about running out of money. He also writes about sustainable withdrawal rates, long term care insurance, and gives his views on the current state of the stock and bond markets in the developed world.

Most of the rest of the book is similar to The Real Retirement, although it is told more like a story with real couples who have different income levels and different needs for retirement savings.

Overall, the new book is more accessible for everyday readers and I think most people would really benefit for reading it. I came away from reading this book thinking it must be tough as an actuary to know the odds of all these bad things happening to you. It’s probably much better to be blissfully unaware of the odds as long as you have a solid retirement plan in place.

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