Friday, July 1, 2022 / by Mario Daniel Sconza
It’s natural to have uneasiness over the state of your retirement preparedness due to the inherent uncertainties involved:
There is no shortage of variables to consider when trying to figure out how you are going to fund your retirement dreams. There is also no magic number — often quoted numbers like $1,000,000 or formulas like six times your annual salary at age 50 have no basis in fact, especially not your facts. They have no way to know if your retirement plans include restoring a pricey vintage car or spending most nights glued to a hockey game on the TV. If you got laid off at 50 due to COVID and are now working for a lot less, your former salary is completely meaningless. A financial advisor can help crunch the numbers and offer investment alternatives, but you need to make the big decisions on the type of retirement lifestyle you envision and how much you can realistically afford to sock away along the way to fund that dream. If you really need some kind of number for reference, 2019 Federal Government data showed the average annual spend for a household over 65 (including taxes) was $64,461. As you get closer to retirement and some of the bigger bills fade away (mortgage, kid’s education) you will have a clearer picture of your needs. Retirement age and life expectancy are two more uncertainties to deal with. The average Canadian calls it a day just shy of 83 years, but it is on the rise. If you are 20 now, it is expected that you will have about a 50/50 chance to hit 90! The average age for retirement is 63, so simple math (83 minus 63) tells us you will most likely need at least 20 years of retirement income. Of course, if you have been listening to our advice, you will have been investing your savings in an RRSP and/or TFSA and hopefully developed some other passive income streams to supplement your government pension income. If your employer has a pension plan and you maxed out that and your CPP for 35 years, you may be able to live entirely off of your pension income and not worry about saving anything for retirement. The key point is to make sure you know exactly how much you will get (don’t forget to also confirm the survivor’s benefit for your spouse). The average CPP cheque is $625/month or just over half of the $1204 maximum. Our advice is to investigate your CPP and OAS benefits and determine how much you might get before you make any assumptions. It's never too late to get started, but you have to realize that catching up will be harder than it sounds, even as your income rises. If you have unused TFSA or RRSP contribution limits (you can easily check by looking at your latest income tax assessment), by all means play catch-up as soon as you are able. Another problem with starting late is that you miss out on the magic of compound returns. Maxing out your TFSA every year from age 25 to 65 with an index fund at 5% (TSX 15-year average) would yield $725,000. Starting at age 40 would leave you with only $287,000. You could try and compensate by taking on riskier investments with higher returns, but your downside risk would also be higher. If you are planning to rely on a side hustle, spouse and/or inheritance to get you through retirement, just be aware that those options can be easily derailed. If your spouse dies, your survivor’s pension could be considerably lower. Side hustles are great, but your health may fail or maybe you can’t find something – only 10 to 20% of retirees report doing some sort of work. As for inheritance, your parents may live to be a 100, they may make some bad investments, or they may even get remarried.
- How long will I live?
- Will my health or my spouse’s health fail? and when?
- How much will my current assets and investments grow in value?
- How will will inflation impact the next 5,10 or 20 years?