Financial Friday #161: It's Time to Attack Those Retirement Worries!
It’s natural to feel uneasy (hopefully not queasy!) over the state of your retirement preparedness due to the inherent uncertainties involved. These include, but are not limited to:• How long will I live?
• Will my health or my spouse’s health fail? and when?
• How much will my home or other investments grow in value?
• How will inflation impact the next 5, 10 or 20 years?
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. A recent Bank of Montreal survey just came out with the terrifying figure of $1.7 million for the average Canadian! The problem is that BMO (and everyone else) have no way to know if your retirement plans include restoring a vintage Ferrari or spending most nights in front of the TV. But one is going to cost a lot more than the other!
A financial advisor can help crunch the numbers on investment alternatives, but it is up to you 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 have to have some sort of number for reference, 2019 Federal Government data showed the average annual spend for a household over 65 (including taxes) was $64,461. A newer version of this study is not available, but you can be pretty confident the amount hasn’t gone down any! Of course, some of the bigger bills fade away (mortgage, kid’s education) as you near retirement and you will slowly get 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 any survivor’s pension benefit amount for your spouse). The average CPP cheque is $811/month or about 60% of the $1306 maximum. Our advice is to investigate your CPP and OAS benefits as well as any pension from your job and determine how much you might get before you make any assumptions.
It's never too late to get started with retirement savings, 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 investment returns. Maxing out your TFSA every year from age 25 to 65 with an index fund at 5% 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.
Anxiety is a natural by-product of retirement planning, and the cure is having the knowledge and facts you need to make your own judgement on how much is enough.
Resources:
How to plan your income sources in retirement
If you want the skinny on where your retirement funds may come from, this article from the Ontario Securities Commission quickly covers all the bases.
How to overcome financial decision fatigue
If your tank is empty and you don’t have the capacity to deal with your finances, why would you add money decisions to an already long and overwhelming list?
Canadians opting for shorter mortgage terms
With mortgage rates at their highest level in more than a decade, home owners and prospective buyers tend to focus on getting the best rate. While shopping around, however, experts say borrowers shouldn’t forget about term length.
RRSP, TFSA or FHSA? Young Canadians face a wide range of options
It's nice to have choices, but as a young person looking to invest for the first time it can be a daunting task.
Buying a second home: How it works in Canada
Whether it’s for yourself or it’s an investment, here’s what you should know about the rules, requirements and financial implications of buying a second property.