Recently I was at a local professional development day where the presenter shared a story of how a client of his, wearing a fancy new snowmobiling jacket and driving a new four by four, came in on February 28th to see if he should buy an RRSP. This story happens in Thunder Bay, but it could just as easily have been Fort St John.
The advisor asked him how much he made in income. The answer was $90,000.
The advisor asked him how long he had been at his job. The answer was six years.
The advisor asked him how much he had saved. The answer was zero.
After earning $540,000 in six years, this person hadn’t saved a penny.
The answer to the fellow’s question, should he buy some RRSPs, was obviously yes. Unfortunately this scenario is all too common. People simply aren’t saving enough to maintain their standard of living in retirement.
Here’s a reality check. Let’s say that you are 40 years old and you get paid twice a month. You’ve heard the expression “Freedom 55”, and you think that sounds pretty cool. Given that a prudent retirement plan will go up to age 95 or so, retiring at 55 means that you have 40 years of retirement to plan for. But lets give you the benefit of the doubt (which is another way of saying that you die early), and only plan for a 25-year retirement.
So if you have 15 years to retirement, and you get paid twice a month, you have only 360 paycheques until retirement. And the amount you save and invest from these 360 paycheques has to last 25 years. So how much are you putting away each paycheque? How much you accumulate is a function of three things. How much you put away, the length of time you put it away for, and your rate of return. You can make up a shortfall in one area by overcompensating in the other two areas.
In other words, if you don’t have much time on your side you probably need to sock away a whole bunch of money and get a pretty good rate of return on your money to boot.
The bottom line is that if you are 40 years old and you haven’t started saving yet then retiring at 55 probably isn’t going to happen. Putting off retirement another 5 years will help; that means 5 more years of paycheques and 5 less years that you need to stretch your savings out once you stop working. But even so, 20 years is only 480 paycheques away.
Let’s say that you are saving $250 per paycheque. 480 paycheques means that you will put away $120,000 over 20 years. Now you are going to get some growth on that $120,000, and you are going to need it to be pretty healthy growth mind you, because the scant $120,000 that you put away isn’t going to go very far in a twenty-year retirement. The reality check isn’t finished though. It’s real easy for me to write about a twenty-year retirement and tell you how many paycheques you have until then. Truth be told, I did the math on the little calculator that comes with Microsoft Windows. But remember, I mentioned that a prudent retirement plan goes until age 95 or so, and there is a real good reason for that. Many people are going to live that long. And living to 95 can be a bit of a struggle if your money runs out at age 80.
On top of that there are two more things you need to know; inflation and health care costs. We’ve looked at both in recent columns, but if you missed them, know this: the cost of living will probably double during your retirement and most of the money you spend in your lifetime on health care will happen when you are retired.
The moral of the story is that retirement is closer than you think, and it’s more expensive than you think. Talk to a professional financial planner to see what you need to do between now and then.