A poll done by CIBC in 2018 found the following about Canadians when it came to retirement:
The living standard in Canada is really great but this high standard of living can be expensive. Preparing for your retirement might be an afterthought at a young age but if you want to have a comfortable retirement, you’ll need to start planning now.
|Editor’s Note: This article was written by Vancouver based personal finance expert, Thomas Chan, who is a regular contributor on NAI500. If you live in the Greater Vancouver Area have any questions about your RRSPs or other financial matters, feel free to contact Thomas! His contact information is below.
Thomas will be following our next GCFF online investment sessions focusing on base and battery metals, as well as precious metals. We hope he will use his CFA skills to give his opinion on which of our presenting companies are the most exciting.
Starts at 8:00 a.m. PST / 11:00 a.m. EDT
13 presentations on investment opportunities
Focusing on lithium, nickel, zinc, copper and other base and battery metal exploration companies
Starts at 8:00 a.m. PST / 11:00 a.m. EST
14 Public Company Presentations
Focusing on gold, silver and other precious metals exploration companies
A lot of Canadians think one million dollars is enough because it makes them a “millionaire” but also, it’s a million dollars! But is it really enough? The answer is it depends on your individual situation as well as the goals you have for your retirement. I like to compare this to drinking water. You should aim for 4L a day but so many factors will play into this and can be different for everyone. Same for retirement, things like the age of retirement, the lifestyle you want, how much income you may make after you retire will all play a role in determining the amount you’ll need to retire.
While there isn’t one magic number for everyone, there are a few ways we can figure out how much you need. There are two common rules used to figure out a ballpark number. There is the 25X Rule where it suggests you should assume 25 years of retirement and the 4% Rule where it recommends to withdraw 4% of what you have saved.
Example: Bill determined he will need $50,000 for living expenses. His OAS and CPP will contribute $10,000 of his retirement with $40,000 covered by his own savings. Taking the 25X rule, then one million dollars would be enough for Bill assuming he puts it into an investment portfolio with a 4% return.
However, these common rules are meant to serve as a starting point as there are many factors to consider like inflation, your investment’s rate of return, the age you want to retire. My motto for retirement is: your retirement plan can be perfect, but us as human beings aren’t.
Even the 4% rule and 25X rules has its flaws as it doesn’t adjust with annual withdrawals or factor in recent movements like F.I.R.E where individuals are retiring much, much earlier. So, we can also use a financial calculator to check too.
Another example: Nicole is 30 years old with a $60,000 salary. She would like to retire at 60 while maintaining her current living style. Using the financial calculator and estimating an inflation of 2.5%, Nicole needs $125,000 per year to have that type of retirement. If we multiply this by 10 assuming a 10% return each year at her retirement, she will get $125,000. Or we can be more conservative and adjust for a lower return. Nicole needs to save $10,000 a year with a 8% return in order to reach her retirement goal. Here’s a fun fact: if we divide the $10,000 to Nancy’s income, we get 16.7%. The annual RRSP limit is 18% of your previous income. The Canadian government didn’t randomly select a percentage! They assume if you can save 15-18% with a reasonable rate of return for a long period of time, then you should be set for retirement.
Determining how you want to retire will also factor into the amount that you need and rethink your retirement plan. There are three stages in retirement: the gogo stage, the slow go stage and the no go stage.
The gogo stage is the time right after you’ve left the workforce and every day is the weekend. You travel, you golf, you have activities and you live in the same house. During this stage, you should expect to use more than what you would have made. The slow go stage is a little later where you still enjoy activities but participate less frequently. You’ll spend less than what you used to make during this stage. Finally, the no go stage is when you’ll spend approximately 70% of what you made because you will be spending more time at home with less activities.
Long story short, the law of average estimates $1 million to $1.2 million should allow you to have a comfortable retirement along with CPP, OAS and GIS to help us out. Use these rules to determine a figure that works for you or contact me for a complimentary consult to talk about your retirement goals or learn more about retirement on my YouTube.