For many of us, our financial planning decisions have been based on general rules of thumb, rather than information relevant to our specific situation. We create our plans around predetermined factors, such as retirement age but have you ever wondered why do we typically use age 65? If you save 10% of what you earn, will that be enough? Does this really apply to everyone?
Save 10% of what you earn – but is that really the right amount?
We have all heard this sage advice and as a general principle, it is entirely true. You should save a portion of what you earn for the future. However, how do you know that 10% is enough? What if you need to save 12% to meet your goals? What if you only need to save 7%, based on your unique situation? A recent study conducted by AON plc found that, on average, Canadians need to save 16% of their annual income to be financially ready to retire. Here is the kicker – this 16% savings is based on starting at the age of 25! Obviously, this is significantly different from the traditional 10% recommendation.
Retirement at age 65 – Says who?
The idea of retiring at 65 is also a guideline that is widely accepted when it comes to financial planning. But why 65 and where did it come from? This number was first established by the German Chancellor Otto von Bismarck in 1880! Yes, you read that right – 1880! During this time, von Bismarck introduced a social security system to appeal to the working class in Germany. The age of 70 was chosen to ensure the program would remain viable since most people never lived that long and was shortly later reduced to 65 (average age of a newborn male and female were 37.7 and 41.4 years, respectively). Since this time, the retirement age of 65 has been used for most retirement plans and calculations, including the Canada Pension Plan which wasn’t established until the mid-1960s.
As you can see, while a retirement age of 65 does have historical relevance, it should not be the retirement age to use in financial planning. Realistically, the retirement age you choose should be relative to your overall plan and objectives. If you want to have the option to stop working at age 55, good on you – plan for it! If you want to keep working while still being financially secure at age 70, keeping going! The point is the arbitrary retirement age of 65 should not just be accepted as the norm.
Life Planning + Finance
Financial planning as we know it is evolving – and for the better. It is no longer enough to make our dreams and desires contingent on outdated rules of thumb. The field of financial planning is becoming more complex as we continue to include more and more aspects of our lives into our plans. However, it is important to note that these complexities have always been there; they just have not been typically included in the financial conversation. This evolution is very exciting and a welcome shift to an age of renewed prosperity.