Putting an end to the 70% rule

I am often asked how much money it takes to live comfortably in retirement. Obviously, it depends on what you plan on doing. However, for those who want to maintain more or less the same lifestyle in retirement, one of the suggested financial planning strategies is to replace your current salary by an amount equal to 70% of that salary (and any other income if you have sources of income other than your salary).

There is no consensus regarding the percentage of income you should replace to maintain your lifestyle in retirement. For several years, the Régie des rentes du Québec has suggested that you replace 70% of your current income. However, that rule is contested and some experts have suggested other strategies. Let’s review the 70% rule.

Why does the 70% rule exist? 

The rule’s objective is to guide people who want to maintain the same lifestyle as they have now in retirement. In retirement, some expenses decrease and others increase. For example, you will eliminate or decrease your contributions to the Québec Pension Plan and your pension fund.

Is 70% enough or not? 

Some specialists will tell you that maintaining 70% of your current employment earnings is too much. I would say that it depends on each person. Consider the case of Catherine, who has an annual income of 30 000 $. If she maintains 70% of that income, she will have 21 000 $ when she retires. Would you like to live off of less than 21 000 $ if you were in her shoes?

In an ideal world… 

The best way to plan for retirement is to determine what you would like to do. Then, you must save according to the expenses related to realizing your dreams. However, I understand that most of you have yet to make specific plans for your retirement, especially my younger readers. It is not easy to know exactly what we will want to do 20 or 30 years from now, and it is even harder to know whether we will be healthy at that time. Do not get caught off guard!

So, is the 70% rule perfect? Certainly not! However, it is useful for people who do not have specific plans for retirement yet because it can be used as a guide. Would you prefer to save a certain percentage every year? If it allows you to make your retirement dreams a reality, why not? The important thing is that you have a financial goal and that you work towards fulfilling it.

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