Going it alone: Retirement for singles

Life after work is a challenge for single people: they can’t just take the amount couples save for retirement and divide it by two — they need much more. Luckily they have a hidden advantage that couples lack.

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From the June 2011 issue of the magazine.

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Sisters Andrea and Diane Wilson are both avid readers of MoneySense, but they have a bone to pick. You see, the Winnipeg women (we’ve changed their names and some identifying details) are both in their mid-50s, and they turn to the magazine to gain insights for their approaching retirements. But they find that much of our advice doesn’t apply to them. The reason? They’re both single. “The articles are predominantly geared towards couples,” says Andrea, who’s been divorced since her 30s and has no kids.

“It just leaves me wondering,” adds Diane, a widow since her 40s with a grown daughter. “Do you just halve the numbers and think that’s you? Or is it totally different?”

As the author of much of MoneySense’s retirement coverage, I have to admit it’s fair criticism. So I decided it was time to go through the key issues of preparing for retirement as a single person. I’ll describe how much singles will need to spend to maintain a typical middle-class active lifestyle in retirement, how much they’ll need to save, and describe some planning issues that are particular to being single.

Some of our findings will seem alarming at first glance. To answer Diane’s question, no, you can’t just take the numbers for couples and divide by two. That’s because singles don’t have the same opportunities to share costs for things like accommodation, vehicles, and running a household. The fact is, singles will have to save more for retirement on a per-person basis than retirees who can split the load with a partner.

But before you get too depressed, many singles do have a secret advantage that tends to level the playing field. If they’re not raising children, they have far more opportunities to save during their 30s and 40s, when couples are typically up to their necks in dirty diapers, daycare costs and monster mortgages.

Read on to see how the grim facts and the good news affect your ability to achieve a comfortable retirement on your own.

Grim FACT #1: Retirement costs more for singles. Sharing saves money. Retired couples split the cost of a home and can often get by with one vehicle, lowering the price tag for the two most expensive items in a household budget. They also share accommodation and car rentals while travelling. Moreover, they can buy food and household items in more efficient quantities, and can divvy up the effort involved in shopping for groceries and preparing healthy, cheap meals at home.

That’s why, as a rule-of-thumb, singles will need to budget for 70% of the combined spending of a couple to achieve a similar retirement lifestyle, says Malcolm Hamilton, an actuary and partner with Mercer Human Resource Consulting.

(I did a quick reality check on this figure, and turned to Statistics Canada to see how much the average single senior actually spends as a percentage of what senior couples spend. The amount was 60%, but I noticed that the average single is a bit older than the average couple. That means this statistic probably understates the cost of an active single senior’s lifestyle, so our 70% figure should be about right.)

Now let’s convert that 70% into actual dollars so you can understand what you’ll need to fork out in retirement.

We’ve found that a typical couple needs to spend a combined $40,000 to $60,000 for a typical middle-class retirement, or about $70,000 for a very comfortable lifestyle.

So, in line with Hamilton’s 70% figure, I estimate that a middle-class retirement lifestyle for a single person will cost about $28,000 to $42,000 a year before taxes. That should apply reasonably well across Canada if you own your own condo or house mortgage-free. If you rent in a big city like Vancouver or Toronto, you probably need to add $5,000 a year to live as well, unless you’ve found a good apartment close to transit and shopping and you don’t need to own a car.

While that range may not seem like much compared to what you spent in your younger years, seniors can usually live comfortably on much less than they spent while working. That’s because they no longer have work-related costs like transportation and clothing, they no longer need to save, they generally pay lower income taxes, and in many cases they no longer have mortgage payments.

Of course, people will disagree about what level of lifestyle is “typically middle class.” Statistics Canada reports that the average single senior spends only $30,300 a year, and the median is even less at just $23,100. However, those numbers include spending by elderly singles who aren’t as active as younger seniors, so I figure my numbers provide a better guideline for an active lifestyle. But recognize that you can get by on significantly less — and many seniors do so without feeling hard done by. On the other hand, if you aspire to something a bit better — such as an increase in your travel budget — you can plan to spend $42,000 to $50,000 a year as a single for an upper middle-class lifestyle.

While we prefer to look at actual dollar costs of retirement, you can also consider the percentage of your working income that you’ll need to replace in retirement. We’ve found that typical couples will need to replace about 50% to 60% of the income they enjoyed while working to afford the same lifestyle in retirement. That’s less than the target of 60% to 70% (or more) that the financial industry traditionally uses, which MoneySense has often criticized as too high for most couples. But it turns out that, in the case of singles, a 60% to 70% target is a reasonable estimate. Hamilton says that the 60% replacement ratio is a good rule-of-thumb for childless single retirees who own their own home, while 70% is more appropriate for single childless renters. (The reason for the difference is that homeowners typically get used to living on less while carrying a big mortgage. As a result, after they’ve paid off the mortgage and retired, they generally need less income to maintain the lower standard of living to which they’ve become accustomed.)

Now that you have a sense of how much you’ll need to spend, we’ll look at the size of nest egg you’ll need. You’ll see this presents another challenge for singles.

Grim FACT #2: Singles need to save more. It turns out that middle-class singles will need a nest egg of about $300,000 to $650,000 if they retire at the age of 65, assuming they have no defined benefit pension from their employer.

The math works like this. We described how the typical single middle-class retirement costs $28,000 to $42,000 a year. We assume you stand to garner $16,000 from the Canada Pension Plan and Old Age Security, based on a long working life with at least average-paying jobs. Thus you need to make up the difference of $12,000 to $26,000 a year from your nest egg. Research has found that you can withdraw up to 4% a year from your nest egg, plus inflation adjustments, and run only a small risk of outliving your money if you retire at 65. As a result, you’ll need a nest egg that’s 25 times your annual withdrawals to generate the 4%. Of course, if you retire early or have lower government pensions, you’ll need a bit more. And if you have a defined benefit pension plan, or expect a parental inheritance, you’ll need less.

While our estimate for singles is a lot less than the million dollars that some advisers say you need, it’s a big challenge compared to what couples need to do. We’ve found that a couple retiring at 65 will need to save a combined $250,000 to $750,000 to enjoy a typical middle-class lifestyle (assuming no employer pensions). Singles have to save a nest egg of $300,000 to $650,000 on their own. So they have a much bigger savings burden than couples on a per-person basis.

While this no doubt sounds daunting, it’s not all dismal news. Being single may bring with it one major offsetting advantage.

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The Saving grace: Singles usually have more opportunity to save. The good news is, while singles need to save more for retirement, they often have more opportunities to sock away money during their 30s and 40s, when couples tend to be raising kids. (We realize we’re making generalizations here. Single parents have greater financial burdens than two-parent families, and childless couples have the most opportunities to save. We will look at the situation of single people with children in a future issue.)

Make no mistake: kids are expensive. A typical single without children can live on a lot less than a two-parent family during the working years. It’s not just the cost of food, clothing, daycare, sports and summer camp — not to mention the hefty costs of university tuition. It’s also the likelihood that you’ll buy a three-bedroom house and a couple of big vehicles to accommodate a family, and that one spouse might take time off work to raise the kids.

Then there’s the fact that these costs arise many years from retirement: parents in their 30s and 40s usually can’t afford to put away much for retirement, so the bulk of their saving tends to come after the kids have left home and the mortgage is paid off. But childless singles who start investing for retirement when they are younger can build a substantial nest egg with smaller contributions, simply because they have more time to let their portfolios grow.

What do these costs add up to? Estimates of the cost of raising a child to age 18 have typically come in around $160,000, sometimes more. MoneySense calculated that raising kids in Canada, on average, costs upwards of $240,000 — more than $1,000 a month — until age 18. And that doesn’t include supporting your kids through university, which will run you about $80,000 over four years if a student lives away from home. These are tremendous costs that single people without kids don’t have.

Of course, to build a $300,000 to $650,000 nest egg as a single person you still need the discipline to save much of that money in your 30s and 40s, instead of spending it on your lifestyle. If you can do that, you’ll be on a fairly even playing field with couples.

But what if you haven’t saved early on, and now you’ve reached your late 40s or 50s without much in the bank? There’s still a lot you can do. If you’re a homeowner who has been gradually paying down a hefty mortgage, you often have a chance to supercharge your savings at this stage in life, once you finish paying off your home loan. If you take all the money that once went to your mortgage and redirect it to your investments, you should be able to build a healthy retirement portfolio in a relatively short period of time. If that doesn’t apply to you — or if that’s not enough — you may need to consider less appealing options, like working longer, or paring back your lifestyle to fit your resources.

There’s another strategy that you might consider: getting a roommate, or renting out the basement of your home. “As you approach retirement, if you can pair up with somebody, you can find many of the economies that elude singles,” advises Hamilton. If you live in a major city with easy access to good transit, you might also consider services like AutoShare or Zipcar that provide the occasional use of a car, rather than buying your own. And finding a travel companion to share car rentals and hotel rooms can help you to extend your vacation budget.

We realize that single people who are accustomed to independent lifestyles may not relish these ideas. “When I travel with people, I want my own room,” says Diane Wilson. “I’m not 15. I don’t want to bunk with somebody.” And while the Wilson sisters are good friends and often do things together, they both rent separate apartments. “People probably wonder why we don’t share an apartment to save on rent,” says Diane. “No, never. She has her life. I have my life. I think it’s just really healthy. We do not live in each other’s back pockets.”

Whatever their living arrangements, there is no reason why singles of average means can’t enjoy retirements every bit as comfortable as those for couples. The Wilson sisters are well on their way to achieving just that. They were brought up to be responsible with money, and they have both saved diligently while holding down professional careers in the public sector and splitting a moderate inheritance. In Andrea’s case, her former husband wasn’t up to her standards of financial responsibility, and that contributed to the breakdown of the marriage many years ago.

While neither sister has a firm retirement date in mind, they can expect their investment portfolios and generous public-sector pensions will provide a retirement standard of living well above the average. Diane also collects survivor benefits from her late husband’s pension.

The sisters aren’t spendthrifts — they both drive older cars and brown-bag their lunches—but they’re active and they like to travel, often to exotic destinations. They stay fit by working out at the gym. They like to socialize with a wide circle of friends. They like to enjoy life. And while they are open to new relationships with men, they’re careful to protect their hard-earned financial independence. “I don’t want to meet someone who has nothing and is up to his eyeballs in debt,” says Diane. “I’d be running the other way.”

The sisters haven’t always found it easy to get by without a partner, but they haven’t let that hold them back, either. And now they can see their retirement dreams well within reach.

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