Most middle-income Canadians know they need to save substantially to enjoy a comfortable retirement. The situation is different, however, in the case of low-income households, which Statistics Canada defines as those earning less than half of the median of about $68,000. A significant source of their retirement income is the Guaranteed Income Supplement (GIS). The more they save, the less GIS they will receive. As a result, the optimal amount to save is surprisingly low. Consider a two-income couple earning $50,000 a year in total. If they saved 10 per cent of their pay in the years leading up to retirement, whether in an RRSP or a TFSA, their disposable income in retirement would be substantially higher than during their working years. This may sound like a good thing, but not if it comes at the cost of further depressing working income that is already low. The ideal saving rate for this couple is about 4.2 per cent a year. It produces after-tax income that is virtually the same before and after retirement. Incidentally, the chart also suggests that the 4.2 per cent of pay that they do save should go into a TFSA, not an RRSP.
Frederick Vettese is former chief actuary of Morneau Shepell and author of Retirement Income for Life.
