How much do you need to save for retirement? Well, it depends on your lifestyle. Consider Prince Jefri Bolkiah, a member of the Brunei royal family. Prince Jefri turns 65 this year – the typical retirement age. During a period of about 10 years, he spent US$2.7-billion on aircraft, yachts, cars and jewellery. The magnitude of his spending several years ago – at US$500,000 monthly – came to light during a lawsuit he faced (the judge put him on a fixed allowance of US$300,000 monthly at that time). With inflation, who knows what his spending looks like today? Somewhere slightly above the average Canadian’s budget, I expect.
Given that it’s registered retirement savings plan (RRSP) season, and the contribution deadline for 2018 is coming up on March 1, it’s a good time to think about the value of investment assets you’re going to need on the day you retire.
What you’ll need
You need to think about how much you expect to spend each year during your retirement. Your spending will dictate the pot of money you’ll need waiting for you on your retirement date. The best approach is to look at how much you spend to meet lifestyle costs today. The consensus among financial planners is that you’ll likely need 70 per cent to 80 per cent of your pre-retirement income to maintain your lifestyle in retirement.
How so? Why wouldn’t you need 100 per cent of your pre-retirement income to make ends meet? The idea is that some expenditures will fall by the wayside when you retire, such as commuting costs, the costs of saving for retirement itself (many people contribute 5 per cent to 10 per cent of income to savings annually), and ideally your mortgage payments will be a thing of the past by retirement.
You do need to evaluate whether the 80-per-cent rule makes sense for you. You could spend more than this if you plan to travel a lot or pursue an expensive hobby. On the flip side, you could spend less than 80 per cent if you downsize your home, the kids are off your “payroll," or you live a simpler life. The standard rule of 80 per cent is a good starting point in my mind.
Suppose, for example, that between you and your spouse your combined income is $100,000 annually. Using the 80-per-cent rule, you’ll need $80,000 to make ends meet in retirement. Now, suppose you and your spouse expect to receive $47,000 a year from the Canada Pension Plan, Old Age Security and a company pension. This leaves $33,000 that you’ll need to draw from your own savings.
How much does your nest egg need to be on your retirement date to provide $33,000 of income annually? Use the “Rule of 30” here. Simply take $33,000 and multiply it by 30, for a total of $990,000, or pretty close to $1-million. So, you should aim to have $1-million saved up by retirement to provide that additional $33,000 of income you’ll need. The Rule of 30 is remarkably easy and a pretty good estimate.
How to get there
Are you on track to save what you need? Let’s use the example of $1-million. Consider the young person in their early twenties. If you’re in this boat, you’re likely focused on paying for your education or paying down student loans. RRSPs may not be your top priority – and while time is your biggest ally in saving for the future, you don’t need to panic if you haven’t started setting aside money in your RRSP or tax-free savings account (TFSA).
As you reach your early thirties, you may have a mortgage, kids and vehicles to pay for. So, saving can be tough. I’d encourage you to save what you can as you reach this age, but just as important, avoid overspending and burying yourself with too much debt.
By the time you reach your midthirties you’ll need to starting contributing to your retirement savings more earnestly. If you contribute $10,000 a year to your RRSP starting at the age of 35, you’ll need to earn 7.3 per cent annually to have about $1-million waiting for you at 65. Generating that kind of return is not guaranteed, of course, and perhaps saving $10,000 annually is tough at age 35, so you may need to set aside more than $10,000 annually as you get into your forties and fifties to ensure you end up with the $1-million you need by age 65.
Finally, if you can’t do the math yourself, visit a trusted financial adviser who can help you to know that you’re on the right track.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
Tim Cestnick