Q. I need some advice on saving for retirement. I’m 34 years old and hope to retire at age 65 with a gross annual income of $70,000. I currently earn $110,000 a year from my job at a law firm.
I recently ran a quick, non-scientific calculation, and assuming I die at age 100 (I presume here that I have my grandmother’s genes for longevity, as I definitely inherited her hips—she’s 95 and still drives her car like a boss.) The numbers I ran show I would need to save close to $2 million to afford this retirement and that is a scary number!
I currently save $20,000 a year for retirement and have about $200,000 in retirement savings between my RRSP and TFSA, invested in a mix of ETFs, government bonds and employer-sponsored funds in a group RRSP. I apply an investment mix of 40% fixed-income and 60% equity. I also co-own a $600,000 home in Montreal with my partner, and we have a two-year-old for whom we save in an RESP.
My partner and I are not married and don’t plan to marry, so I prefer to plan retirement saving as if I were single. Am I on track to retire at 65?
— Thanks for your advice, Jenna
A. Hi Jenna. I bet that $2 million dollar number looks a little scary. Luckily you don’t need to save $2 million by age 65 to have an annual gross retirement income of $70,000. I think you may have forgotten to include your CPP and OAS payments in your non-scientific calculations.
So I’m going to compare the results of non-scientific calculations to the results obtained using professional financial planning software. This way, we can see the differences, check if you’re on track, and hopefully get you feeling good about your retirement.
Let’s start with some quick calculations. You’re trying to get to $70,000/yr. of gross income from age 65 to 100, or 35 years. By the way, $70,000 of gross income is about $56,000 a year after tax.
If we do some quick calculations to figure out how much money you’ll need to save by age 65 we might follow this thought process: With the new CPP rules, your combined CPP and OAS will be about $32,000/year at age 65, assuming you work to age 65. That means you only need to save enough money to provide you an additional income of $38,000/yr. for 35 years. That makes sense, right?
In your case, you are planning for a 35-year retirement so we just need to multiply 35 years by $38,000 for $1,330,000. Assuming no growth, no tax, and no inflation, you’ll need $1,330,000 by age 65. That’s already a lot better than your $2 million dollar figure.
It gets better. Today, you already have $200,000 saved and you are saving $20,000/yr., so over 31 years, between now and age 65, that is ($20,000 x 31) + $200,000 = $820,000. Again, no investment growth on the money. That’s not so good because my quick calculation showed that you need to save $1,330,000 by age 65 and you’re only going to have $820,000. You’re about $510,000 short! How are you going to make that up? Don’t panic though.
Let’s now take a moment to look at the results you’d get using financial planning software.
- You only make RRSP contributions
- Inflation is 2%
- Investment returns are on average 5% net after fees.
The model shows that you only need to save about $830,000 by age 65, which is $500,000 less than our non-scientific method results, and a lot less than $2 million dollars. It also shows that you only have to contribute $10,000 per year. to your RRSP. You don’t have to contribute the $20,000 per year you are contributing now.
So our model using the proper software shows you’re in good shape Jenna, even though the quick calculations showed that you’re in trouble. Whew!
Here’s a suggestion for you. You’re already maximizing your RRSP contributions. My software tells me that if you continue to maximize your RRSP contributions to age 65 you could have an indexed retirement income of $70,000 after tax to age 100.
Make it your goal to maximize your RRSP contributions. Then use the $9,000 RRSP tax deduction to maximize your TFSA and your RESP. Do that and you’ll be in great shape, hips and all.
Allan Norman is a certified financial planner and Chartered Investment Manager with Atlantis Financial Inc. in Barrie, Ont.
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc. and can be reached at firstname.lastname@example.org
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