Many Canadians may need substantially more income in retirement if their goal is to maintain their pre-retirement lifestyles, suggests new research from Fidelity Investments Canada Ltd.

“The financial advisory community has generally thought that if an investor is on track to replace 70% of their current income, they should be able to live comfortably in retirement. While this ratio has been used for many years, there is surprisingly little research to actually support it,” said Peter Drake, vice president, retirement and economic research, Fidelity Investments. “In many cases, the ratio is probably too low.”

Although Canadians usually experience a net reduction in spending on things like taxes, public benefit plan contributions, and savings as they stop working, Fidelity has found that many people are not planning to scale back their lifestyle and expenses in retirement, which suggests Canadians should aim to replace considerably more income than the traditional benchmark suggests.

The changing retirement landscape prompted Fidelity to re-examine the 70% retirement income replacement rate. No longer are Canadians retiring at 65 years old and living the following 15 to 20 years at a relatively less active pace. At the same time, the median retirement age in Canada has declined from about 65 in 1979 to 61 today.

Increasingly, retirees are taking up new challenges and pursuits, and spending a lot more time doing the things they love. Canadians are also living longer, with life expectancy increasing to 84.5 years from 81.9 years over the last 25 years.

In its research, Fidelity analyzed the available streams of income for retirees including what they can expect from government sources Canadian Pension Plan, Quebec Pension Plan, Old Age Security), what they will be responsible for themselves (retirement savings, investments, company pension plans) and how they fit into Fidelity’s new retirement math.

“With so many retirees planning on having full and active retirements, Fidelity’s new research shows that Canadians should now aim to replace 80% of their pre-retirement income if they wish to maintain their lifestyles in retirement,” said Drake. “This will mean changes in how Canadians are saving, spending, and managing their taxes.”

Anticipating retirement spending requirements is crucial to determining how much income a retiree must replace. So, when an individual is contemplating their income in retirement, they should consider three primary factors.

* Post-retirement consumption levels: Households that plan to spend less will obviously have to replace less income, and vice versa. For example, reductions in employment-related expenses, paying down a mortgage, and reducing discretionary spending will all help to lower a household’s replacement rate. Conversely, increased travel, recreational spending and health care costs can increase replacement rates.

* Pre-retirement savings rates: Savings habits before retirement have a double effect on income replacement. Those who restrain their pre-retirement lifestyle in order to save sizable amounts will increase the income available to them after retirement, especially if they have taken advantage of tax-sheltering strategies such as RRSPs. In addition, they will need less income to maintain their same lifestyle. Those who saved less and had more expensive lifestyles before retirement will have both more income to replace and fewer assets with which to do so.

* Tax management: Taxes can have a significant impact on income in retirement. Income-splitting of pension plan and other registered plan income and CPP/QPP benefits can reduce taxes in retirement for couples and limit the Old Age Security claw back, leaving more for lifestyle funding. Contributing to individual and spousal RRSPs before retirement is an effective way of reducing taxes for couples and individuals alike during working years.

“While everyone’s dreams for retirement will be different, one thing they should be consistent about is having enough retirement income to support their lifestyle,” added Drake. “Having a plan and working with a financial advisor can help ensure that this next stage in life is full and satisfying.”