The article “Retirement Planning Can Be So Complex People Avoid It Altogether. Here’s How To Avoid That Trap.” was originally published on Financial Post on August 24, 2020.

There are ways it can be simplified

Saving for retirement can be a daunting task. For some people, it is difficult enough to cover their living expenses, let alone put aside money for retirement. For others, the challenges include not only figuring out how much to save, but also, which accounts to contribute to, and which investments to buy. Retirement planning has become more difficult over time, but there are ways it can be simplified.

In the past, more workers were covered by registered pension plans. 46 per cent of workers had an RPP in 1977 compared to only 37 per cent in 2017. Retirement also used to be shorter — retirement age has decreased over the same period by about two years while life expectancy has increased by about eight years.

The appeal of a defined-benefit pension plan is simple. Participation is often automatic. There are no investment decisions to make. There are annual estimates of a plan member’s future retirement income. DB pension plans reduce the planning required to retire.

Only about one quarter of Canadian workers have defined-benefit pensions. That means most people must accumulate and calculate their retirement income on their own. The difference between good and bad retirement planning choices may be less about delaying the gratification of spending today to save for tomorrow, and more about the complexity of making retirement planning decisions in the first place.

A 2019 study called “How Much to Save? Decision Costs and Retirement Plan Participation” (Goldin, Homonoff, Patterson, Skimmyhorn) looked at the retirement planning decisions of a pension plan for 300,000 active duty U.S. Army service members. One of the key findings was that if the decision to participate in a pension plan required too much thought, people may not contribute at all.

The Army offers a retirement plan to all employees. New employees receive information about the plan when hired. Some new employees in the study were also sent information by email about how to enrol in the plan and encouraged to join. Others received the same pension email, but with a highlighted rate (i.e. one per cent, two per cent … eight per cent) for suggested contributions. Another group did not receive an email about the plan encouraging them to join, nor highlighting a suggested contribution rate.

The results showed that the employees who received an email encouraging them to join the plan increased their participation rate by 15 per cent compared to those who did not receive an email. The employees whose email also highlighted a suggested contribution rate had a 26 per cent higher participation rate than the baseline.

According to the authors, “The difference in the estimated effects between the two types of emails suggests that at least part of the overall observed effect stems from highlighting a specific contribution rate rather than simply encouraging enrolment.”

The study also found that the same increase in participation applied two years later. So, the email and the highlighted contribution rate did not just accelerate participation — they increased participation overall.

There are several other recent studies that point to a similar impact on behaviour by introducing nudges that positively influence financial decisions. What I found interesting about this particular study was that it suggests that something as simple as deciding how much to save for retirement could discourage a saver from saving, period.

Trying to determine how much to save for retirement is not easy. Workers must consider whether to save, how much to contribute, which accounts they should use and what investments to buy.

Tax Free Savings Accounts have been around for more than 10 years now and have largely benefited both low and high-income savers. However, it may be that for some, the complexity of choosing between a tax-deferred registered savings plan like a Registered Retirement Savings Plan (RRSP) or a tax-free TFSA is just another disincentive to begin saving.

Although it pains me to speak in generalities about financial decisions that should be highly personal in nature, here goes nothing.

If a 40-year old saves 10 per cent of their salary each year and works until age 65, using conservative assumptions, they may be able to replace more than 50 per cent of their final year’s salary in retirement — including Canada Pension Plan (CPP) and Old Age Security (OAS) — adjusted annually for inflation. I say “may” because it depends what they have saved prior to age 40, and I have assumed nothing in this example. I have also assumed they have an average income and have contributed to the CPP and lived in Canada for most of their adult life.


This estimate may also change depending on their investment risk tolerance and fees. Earnings increases would have an impact, as would life expectancy. I assumed a moderate risk tolerance, modest investment fees, steady salary growth, and an average life expectancy. Other adjustments to our calculations may be necessary if our notional saver expected to downsize in retirement or to receive an inheritance. In fact, there are many things that could cause a default rate such as 10 per cent to be wildly inaccurate for an individual saver. Frankly, there is no magic to replacing 50 per cent of income either. Everyone will have a different income replacement rate required depending on which pre-retirement expenses will continue into retirement, plus several other asterisks.

For a 30-year old, the income replacement may be more than 60 per cent with a 10 per cent annual savings rate and age 65 retirement. A 50-year old getting a late start may only replace about 45 per cent of their income by 65.

In the absence of someone taking the time to assess their unique personal circumstances, the “How Much to Save?” study highlights the benefit of a retirement planning recommendation that can be tweeted in 280 characters or less.

So, I am willing to suggest that a mid-career saver aims to put aside roughly 10 per cent of their income if they are looking for a quick answer to how to replace about half of their income by age 65. 10 per cent is better than nothing at all. However, the “right” amount could range from 0 per cent to 20 per cent, or less, or more.

Asking a financial planner for a generic answer on how much to save for retirement is like asking a doctor to prescribe a drug that your whole family can take for any illnesses they have over the next 20 years. There is a reasonable chance an aspirin will help, but maybe not.


In order to stick with generalities to keep saving simple, if you have a group savings plan with an employer matching contribution, you should probably participate. The match provides an instant rate of return beyond other saving options. If not, you should consider an RRSP if your income is relatively high, but favour a TFSA if your income is relatively low.

Your investments should always match your risk tolerance, but the more exposure to stocks, the higher your long run returns will be despite the increased short run volatility. The higher your returns, the less you will need to save, the earlier you can afford to retire, and the more you can safely spend in retirement.

If you have a mortgage, and you have a conservative risk tolerance, there may not be an overwhelming advantage to saving first versus accelerating your mortgage repayment and then saving when your mortgage is paid off. Both are good choices and will help you become financially independent.

I hope some quick answers encourage you to do something to avoid doing nothing. At least that way, your own answer to how much to save is less likely to be way more than what you can afford by the time you are closer to retirement.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.