By Sheryl Smolkin

The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.

However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.

Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.

In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.

Initially, they note that there are three phases of retirement:

Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.

Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.

Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.

As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.

I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.

They use the following population breakdown in their calculations:

Income Quartile	Average total income (couple)
Quartile 1	$29,000
Quartile 2	$53,000
Quartile 3	$78,000
Quartile 4	$110,000
Quartile 5	$204,000

The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.

For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.

Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.

Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.

The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.

A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.

This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”

While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.

But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.

The Real Retirement can be purchased online from Chapters for $15.64.