Whether your a young aspiring investor or an experienced veteran, a question that often comes to mind is “how much do I need to retire?”. The fact is, this question is not just a simple number for everyone. It requires careful planning and calculating. As passing time is something we all have to face, retirement is a well known concept in our society. At some point you will need to sustain yourself in your old age, and the key to doing this properly is planning your future in a structured and logical manner that allows you to reach an enhanced stage of well being in your old age. The breakdown is simple, and it is like a recipe for financial security in your old age. “How much do I need to retire” is a broad question, as the answer is literally different for every person, Here are a few questions to get you started down the right path to finding that magic number.
- How much do you earn now?
- How much of this do you expect to need in the future (e.g 70% of an $60k salary)?
- What kind for return are you expecting on your investments, and how much risk are you willing to take?
- How much are you saving on a yearly, monthly or weekly basis currently?
Just like a recipe, this is a process that can be executed systematically step by step. The key is to remember that you are in control and with all the variables available to you chances are you can find a solution that makes sense. For example, if you think you might not be able save enough to have $40k a year when you retire then you have a few options, lets break all of these down one by one.
Reduce your expected amount needed for retirement
This is usually one of the first steps in the financial planning process, we all love luxury and enjoying our day to day, but sometimes it is not feasible. However this does not translate into a meal of bread and water every day! A small sacrifice to your expected outcomes and something small like a $200 reduction of expected usage saves you over $60,000 in savings over ages 65-90.
Increase your working age, this gives you more time to save and compound investment returns
Unfortunately this is an option more and more people are turning to. We are faced with an environment of stagnated wage growth and rising cost of living.The official retirement age was recently raised to 67 years old, and that is an indication of the general trend in the economy.
You can save more on a per period basis, e.g 100$ more per month or $1200 more per year.
This is a no-brainer, and I think it is not too hard to explain how saving more every month or year leads to more savings in the future. The lesson here is discipline. For those not able to make lump sums every year, you want to look at making things automatic, saving you time and hesitation on a monthly basis. Starting with a small $25 or $50 investment plan goes a long way for your future.
You can take a higher risk in your investments
Instead of locking your funds in a 1,2 or 5 year GIC, you can put them in growth ETFs or mutual funds for the longer term. Increasing the investment rate is definitely something people are more hesitant about, but one thing to keep in mind is the erosion effect of your purchasing power due to inflation. A GIC just does not cut it in today’s low interest rate environment. If you are young, investing from a growth perspective and letting your returns compound over time is the single most important thing you can do for yourself. This means that monthly plan we talked about, or those lump sum savings, need to go in growth ETF’s, or mutual funds or individual stocks. Creating a portfolio with varying amounts of ETF products like the S&P500 Index, the TSX Composite Index and the MSCI World Index should likely go further than any 2.00% GIC will ever do.
It is difficult to pinpoint one specific number that sustains you through your old age. And maybe that’s disheartening, because people would love to be told something like “if you have $275,000 by age 65 then you are good to go!”. But everyone has different circumstances whether that is lifestyle, family or individual needs. The key then is having a holistic view of your financial well being, as explained above, it is not one factor that determines how much you will need to retire.
Step 1: Coming up with a figure about how much you think you will need. Look at your current spending habits and living expenses and approximate how much you will need when you retire. Don’t forget to factor things like expected Old Age Security, Canada Pension Plan and your individual company pension plan. The government of Canada has a great walkthrough of CPP located here.
Step 2: Use a quick retirement calculator to play around with the variables and see where you can improve on and where you might have to make sacrifices. Yourmoneyrelationship actually has a great article on retirement planning tools that you can check out.
Step 3: Use this data to make a plan!
When you have this information to start, you can begin to action it into the tools and products available to Canadians trying to make a better future for themselves. This is then deciding whether to allocate funds to an RRSP or TFSA, or both. You can view our article on The TFSA vs The RRSP and RRSP Income Splitting for further information.
If you have been looking forward to retirement only to discover a lack of cash is making it no fun, it is time to increase your income. A reverse mortgage is a loan only for people of retirement age that can help you. To get it you have to own the home, agree to continue living in it permanently and be at least 62 years old. If you meet the requirements, you will receive a percentage of your home equity, which can be determined with a reverse mortgage calculator. Then you have to use some of the money to immediately pay off any mortgage you already have. After that, the remainder is yours to spend on anything with no need to pay it back right away. However, it will keep accumulating interest. When you leave your home it will be sold, unless you pay the balance with interest.
If you asked an adviser how much you need to retire, you will be getting similar advice, albeit if you have complicated tax issues (like capital gains or losses), holding companies etc. The key at the end of the day is to understand your ability and financial picture, only when you do this and understand the inputs, can you be in control of the outputs of your future.