|Begin saving early and as frequently as possible to meet your retirement goal.
In Canada, about a third of adults have said they haven’t saved anything for retirement, while three quarters of Canadians view their CPP payments as their primary or secondary source of retirement income. Interestingly enough, according to Decima Research, more than one in five Canadians is expecting an inheritance to help improve their retirement savings.
Ten per cent of retirees return to work because of their financial situation and roughly 20 per cent have postponed their retirement because they feel they don’t have enough retirement savings.
The questions that then need to be answered are: When do you start saving for retirement and how do you balance saving for retirement with other financial goals?
Most people in their mid 20s to mid 30s would rather spend their money now and worry about saving for retirement later. During this period, you are likely to deal with immediate financial concerns like buying a house, starting a family and establishing your career. From your mid 30s to late 40s your career is generally more established and you are more likely to be financially secure with the ability to start to accumulate savings. If you wait until your 50s to start saving for retirement, it may be too late.
As you plan for retirement, look at your overall financial picture. This would include paying off debt, setting up and contributing to RESPs for your children’s education and taking care of aging parents.
People’s biggest concern is figuring out just how much capital will be needed. If your pre-retirement income was $70,000 annually, some experts suggest you will be able to maintain your lifestyle during retirement on about 70 per cent of that or $49,000. You first need to look at your sources of retirement income. Government benefits (CPP and OAS) will make up a third of that total with the remaining two thirds coming from you. Others suggest you can get by with 50 per cent pre-retirement income. But in this case, you must be debt free and not have expensive hobbies.
Remember, there’s no magic number for retirement savings. Sherry Cooper, chief economist at BMO Nesbitt Burns, offered this method a few years ago to determine how much capital you need to retire. First, decide on your annual retirement income amount.
Deduct from that the amount you will receive from government and corporate (if applicable) pension plans. That will leave you with a savings shortfall. If your goal is to be penniless at age 90, Cooper suggests you will need 15 times the shortfall as a capital base at retirement. Cooper’s rule of thumb is based on a few assumptions: you retire at age 65, live to age 90, earn an average of eight per cent on your investments before inflation (which in the current low rate economic environment is likely very difficult to achieve) and that inflation will be three per cent a year during your retirement.
If the answer to how much capital you need to retire were an easy one, there wouldn’t be an abundance of literature and retirement calculators offering advice and analysis.
The answer will depend on the lifestyle you want to enjoy in retirement, your family situation, the amount of money you want to leave for your estate and other considerations. One thing is for sure, the earlier in life you start saving, and the more often you save, the faster your nest egg will grow and the greater your chances of meeting your retirement goals will be.