Do you really need to have $1M to retire?

EPISODE SUMMARY

In this episode, Evan covers off some rules of thumb for saving for retirement and how to know if you’re on pace.  Evan answers the question of whether you really need $1M to retire.

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TOPICS IN THIS EPISODE

1. How much do you actually need to save for retirement 
2. What impacts your retirement savings needs 
3. Savings rule of thumbs and systems
4. Recommendations to make saving as easy as possible 
5. Is $1M the right amount to have for retirement 

RESOURCES MENTIONED

The Rule of 30 - book


OTHER EPISODES

17. Investing Basics Part 1 - Stocks

18. Investing Basics Part 2 - Bonds

27. Will you Have any Guaranteed Sources of Income in Retirement


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Transcript

Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today we're talking about the big one. How much do you actually need to save to be able to retire?

Today we are continuing on with my retirement readiness series and this episode covers off the question of “how much do you really need to have saved for you to be able to retire?” The title of this episode talks about the $1 million mark and do you actually need a million dollars to retire?

I'm going to cover that off in a second here, but if you are new to the podcast, welcome here and head over to my website, www.evanneufeld.com and you can download my retirement readiness checklist.  You can follow along with this episode and some previous ones, as we cover off a number of topics to make sure that you are as ready as possible to eventually retire.

Let's answer that question first. Do you really need a million dollars to retire? Well, just like the best answers to most questions, it depends. I'm not really sticking my neck out too far here, but a million dollars is kind of an arbitrary number. It sounds like a big number and it's easy to put in headlines to scare people that don't have that much saved. It also makes people feel really good if they do have that much saved because this is big mental hurdle to get over, but let's just talk about reality. Do you need a million dollars to retire? Well, it depends and it depends on a variety of factors. You might need significantly more than a million, but you might actually need significantly less.

The main one is going to be your spending habits. So what types of things do you spend your money on all the time? When you get money do you spend it right away or are you quite frugal? Where do you shop for groceries? How often do you go out for meals, things like that. Another thing is debt. If you carry debt through retirement, your lender is going to be the first one to get a lot of your retirement income, whether that's coming from your own savings or pensions or things like that. If you have debt, it makes it really, really challenging to retire. Even if that's a mortgage at low interest rates, it just means more dollars going somewhere else besides your retirement needs. Another thing is location. I'm here in Saskatchewan and we're probably one of the more affordable places to live in the country.

If you lived in downtown Toronto or Vancouver, your cost of living is going to be a lot higher than other places like the east coast or the prairie provinces.

So everything from property taxes, to even provincial sales taxes, fuel costs, all those little things that you might not think about when it comes to retirement savings, that'll have a big impact on how much you'll actually need to have saved. Another thing that people spend a lot of money on in retirement is traveling. I like traveling a lot. Some people like to do short little trips up to lake country or other people like to do big extravagant trips out to Europe for months on end. Travel is a big part of most people's retirement savings and so they need to plan for that. If you're not a traveler and you are a bit more of a homebody, you'll probably need a little bit less than a million dollars. And if you like to do those big extravagant trips and hang out at the Four Seasons and the Ritz Carlton, you're probably going to need much more than a million dollars to be able to maintain the level of retirement that you'd like.  One final factor that will impact whether you actually need a million dollars to retire or not is whether you have a pension or not.

I have a few episodes talking about pensions, but the main one that I will be referring to here is a defined benefit pension. That means you're going to get paid a set amount of money for the rest of your life. If you have this type of income stream coming in, of course, you're going to need less money saved because you have a lot of that covered for you. So it's a bit tougher to do the calculation on how much you need to have saved when you have income streams already, because you don't need to live off your savings nearly as much because that income is almost like a paycheck.

I confused everybody now because I didn't answer that question. So how much do you really need to have to retire? So there's a million different ways that you can think about it, but the best general advice that I can come up with is to save based on your income and then look for milestones associated with multiples of your income.

Now, we have to do a little bit of heavy lifting here because we have to assume that during your working years. You're actually spending within your means and saving and investing a portion of your income on a regular basis in investments that give a reasonable return. Yikes. Okay. That's a lot of work here because most people actually spend well beyond their means and most people don't actually save and invest their money. But if you're listening to this podcast, I hope you've got some of these things covered already. So let's just move on from there.

I talked about investing and getting a reasonable rate of return. I'm not going to talk about specifics here, but you don't need 15% returns every year to make a good plan work. You can be a more conservative investor and come out okay, but GICs or cash alone won't be able to get you there, especially where interest rates are right now. You will have to take on a little bit of risk, but a typical balanced portfolio, maybe 60% stocks, 40% bonds, more conservative than most of you listening, I'm sure. But you can still make it work with a portfolio like that.

So how much should you save, say you're still working. Let's just get this out on the table and just assume and be honest with ourselves where there's periods of time, where it's easier to save than others. You've got kids at home, you've got a new mortgage, you're saving for a down payment on a home, things like that. So to just have a blanket statement and say, this is the percentage of income you have to save for your retirement, or you're completely out to lunch. No, it's, that's just not true. To have a rule of thumb for your savings, can also be helpful. So you can kind of gauge whether you're a little bit behind or a little bit ahead, but just be honest with yourself and to save where you can, prioritize paying your mortgage, paying your bills, getting your kids fed and clothed and to daycare and all those kinds of things. But saving for retirement is important. So I like to tell people to save 10% of your income for retirement. Depends on a couple of things. If you're investing based on a percentage of your take-home pay, 10% of your take-home pay into a TFSA is great. If you're investing in RRSPs, I’d bump that up a little bit to account for some of the taxes and things like that. If you look at your gross income, so that's the amount that you get paid before taxes and deductions and all that kind of stuff. If you do about 15% of that into an RRSP, keeping in mind, you get about 18% of your income as available contribution room. If you're doing about 15, you'll probably still be reasonably okay. But those are the kind of the rules of thumb and people say, how much should I save for. I Typically tell people as much as you reasonably can, but if you're looking for a specific number, start there and see where you end up.

I have many clients who actually invest significantly more than 10% of their income, even with lower incomes or what people would probably assume to be lower incomes. And the opposite is also true. People that have high incomes end up saving significantly less than that. And it's just a simple fact that your savings rate is going to be a function of your spending rate and you're discipline to stick to a plan.  If you're spending all of your money, regardless of whether you have a high income or low income, you're not going to be able to save anything. But if you're highly disciplined and you don't spend all the money that comes in, you'll be able to save as much as you need to.

This is why I always recommend that you automate your savings and investments, so you can do it without thinking. Most people don't have the discipline to stick to a plan manually, myself included and most people listening, I'm sure. So if you automate your savings and investments, so you can have a set amount of money come out every time you get paid, that's a really good place to start. And like I said before, if you need to adjust it, that's fine. I'm not here to make you feel guilty about that by any means, but you need to set up an automated system so that you can take care of the most important things without thinking. 

Okay, this is where the rubber meets the road. This is where my retirement checklist comes in. So in the checklist down in the second section, there, we talk about hitting your savings milestones. So if you have a reasonable savings rate, adjusting it as you need, you're making some return on most of your investments, things like that. How do you know if you're on pace? Well, this is the number that I like to aim for.

Maybe it's not a hundred percent perfect, but if you have four times your income saved by age 45, that will be the first milestone that you should hit to make sure that you have a reasonable amount saved for your retirement. So things to keep in mind, again, this is four times your income at age 45. A few things to keep in mind is that your retirement will be assumed that you'll maintain a similar lifestyle compared to when you were working. The reason we have to assume that is because we're basing this based on your income during your working years. Right? So if you have a $60,000 salary and you're living as if you have a $60,000 salary, your retirement will probably be a function of your lifestyle at that rate because you're saving based on that.

Some people might say, well, my expenses might go down and so I could actually spend significantly more than that. It's like, okay well that's true. Your mortgage is likely to be gone. If you have kids, they might be at a house, you're not saving for investments anymore and your tax bills likely at a lower percentage of your income. Then we might have other people that say, oh no, your expenses are going to go up because you're going to be traveling. You might need a new vehicle. If you're going to be spending time camping, you need to buy an RV. If you have grandkids at this stage of life, you've got a lot more gifts to buy around Christmas. When you don't have a job to occupy your time, you're going to go out a lot more. You might get cheap coffees at McDonald's or things like that, but a simple fact that you're going to be looking for activities to do and generally activities cost money.

We can go down this road indefinitely, but there's also things like healthcare costs in retirement, that might impact how much you're able to spend on yourself as well. So that's kind of going down a path that we don't need to discuss on this episode necessarily, but if you look for that milestone, four times your income at 45, say five times your income at age 50, six times your income at 55 and so on and so forth. These milestones are pretty good indicators that you're saving enough or you're investing your money to the point where you're getting enough return on your money. That you'll probably be in decent shape. The reason I don't like to look for a milestone earlier than age 45 is that kids are expensive, saving for down payment is expensive and things like that. And so to hit earlier milestones, isn't very beneficial in my mind. So this is giving yourself a little bit of wiggle room if you're younger than 45. If you're older than that, have a look at those other milestones on the checklist and see if you hit those.

So what are some other ways that we can think about saving beyond saving for these milestones, with those percentages of your income? Well, one common savings goal that I've seen in the F.I.R.E community. If you're familiar with F.I.R.E is called financial independence retire early. That's a loaded statement and another topic for another day, of course, but the general rule of thumb in that community is to save 25 times your retirement expense. The challenge of course, is knowing what your retirement expenses are going to be and when you actually end up retiring. But the assumption that does most of the heavy lifting with this goal is that it assumes that you're withdrawing the quote unquote safe withdrawal rate of 4% of your portfolio every year. So I won't go into the nitty gritty of this one in particular, but if you have a reasonable idea of how much you're planning to spend in retirement, and for that 25 times your retirement expenses, that would be a good number to hit. Another one that I've seen recently, there's a book out about it called The Rule of 30.

This book is a little bit more advanced than I would have anticipated for most DIY investors and people that are doing their own financial planning for retirement. That being said, feel free to have a look at it if you'd like, but the rule of 30 says that based on what I was saying before, how sometimes it's easier to save than others. They take this into account and give a specific percentage of your income that you should allocate towards things like mortgage, daycare, and retirement savings. And then as your mortgage disappears, as your daycare cost disappear, then you can allocate more of your money to retirement savings. The rule of 30 says that these numbers should add up to 30% of your income.

Seems reasonable enough, but I can't really recommend this approach because the majority of the assumptions that go into this system are just non-starters for most Canadians and it requires so much tinkering and subjectivity that people will have a hard time sticking to it. For the people that are really struggling to save for retirement, there's no way that they're going to go up and start building all of the spreadsheets required and specific percentages and adjust it month by month to actually make this system work. It's just not possible, but that being said, if you like this system, the rule of 30 and you like to stick to it, that's great.  I believe that the best system for saving is the one that you understand and the one that you stick to, There's ones that I'm going to recommend, of course. And the ones that I recommend are probably the easiest ones to stick to, but if you like a more complicated system, if you like spreadsheets, if you're looking for things like that, check out The Rule of 30.

So all of these things are rules of thumb, general ideas, targets to hit, but your situation is really unique to you and it always will be. And so you can listen to all the podcasts you want. You can read all the books you want, but having a specific plan for your situation will make all the difference for you. In a recent retirement study done by Fidelity Investments, only 25% of people that were surveyed that would label themselves as pre-retirees, only 25% actually had a written financial plan. But of those people that are pre retirees with a plan, 85% of them said that they feel prepared for retirement. Let's contrast that with the people without a plan, pre-retirees without a plan, less than half of them said that they feel prepared financially to retire. So what's the difference. You know, this is a classic knowledge is power type of situation. I'm also going to assume that people without a plan care and they're trying to listen to podcasts, maybe ask friends, things like that. But the difference in this, just with this survey at least, is that people had a plan. So if you would like to work with someone on a plan, my contact info is in the show notes as always head over to my website and you can learn a little bit more, but what that means to work with a planner like myself, but if that's not for you, keep listening to the podcast, it's free. Head over to my blog. There's lots of great resources out there that are free or really affordable at least, and keep learning and do whatever you can to understand your money so you can have a confident retirement.

So let's summarize this episode a little bit more. Do you need a million dollars to retire? I'm going to say flat out, No because you might actually need significantly more or significantly less because your retirement spending needs are going to be based on your spending habits, your debt, your location, what you want to do for traveling, and whether you have pensions or many other factors of course. So how much should he have saved? Again, try to save a percentage of your income, give yourself some grace to adjust this as needed, but aim for about 10% of your income, especially if you're saving in a tax-free savings account that can make your life a whole lot easier because you won't have as big of a tax bill come retirement. If you're investing on a regular basis and you are in that pre-retirement stage, if you have about four times your current income saved at age 45, you're probably on a pretty good pace. And again, we talked about a number of different systems and you might have other ones that I didn't address on this podcast, but the best system for saving and investing is the one that you understand. And the one that you're going to stick to. So do a little bit of research, find what works for you. Try to hit those milestones and make sure you're on a good pace and keep going.

Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors. Before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.