How much to save for retirement varies for each investor. A fulfilling retirement is not simply a matter of accumulating sufficient wealth to give you peace of mind. It is equally a matter of knowing what you will do — in effect, ensuring that you will be as active and productive with your time as you were during your working days.
These days, more investors suffer from what you might call “pre-retirement financial stress syndrome.” That’s the malady that strikes when it dawns on you that you don’t have enough money saved to be able to earn the retirement income stream you were banking on.
To alleviate this worry, we recommend that you base your retirement planning on a sound financial plan. Here are the four key variables that your plan should address to ensure you have sufficient retirement income:
- How much you expect to save prior to retirement;
- The return you expect on your savings;
- How much of that return you’ll have left after taxes;
- How much retirement income you’ll need once you’ve left the workforce.
Consider taxes when determining how much to save for retirement
As for the tax structure, it keeps changing. But it’s safe to assume that you’ll pay a lower rate of tax on dividends and capital gains than on interest, and that you’ll generally pay taxes on capital gains only when you sell.
As for the return you expect, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds. For stocks, the market returned 10% or so yearly on average over the past 80 or so years. Aim lower — 8% a year, say — to allow for unforeseeable problems and setbacks.
Having a good financial plan is important but the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.
Stick with conservative estimates to account for unforeseen setbacks
As for the return you expect from investing for retirement, it’s best to aim low. If you invest in bonds, assume you will earn the current yield; don’t assume you can make money trading in bonds.
Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Aim lower in your overall return — 5% a year, say — to allow for unforeseeable problems and setbacks.
One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.
A Registered Retirement Savings Plan (RRSP) is a great option
RRSPs are a great way for investors to cut their current tax bills and make more money from their retirement investing.
RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)
When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.
Turn retirement income planning into a game
Retirement income planning doesn’t have to be about moving money around. Sometimes it’s easier to live frugally. People who come from humble circumstances often develop a degree of both frugality and industriousness early in life.
Finding part-time work while in school, and making every penny count, becomes a game for them.
It’s easy to let frugality evaporate in mid-life, when money becomes more plentiful. But some find that if they return to frugality later in life, it’s more fun than ever. It’s a little like taking pleasure from a game that you haven’t played since you were young.
Your enjoyment of, or distaste for, frugality is partly a matter of attitude. But that’s under your control. Don’t think of it as penny-pinching. Think of it as taking charge of a part of your life, so that more of your money goes to things you choose.
Do you know how much to save for retirement for your own life? Do you often worry about your retirement and if you’re saving enough money for it? Or do you feel comfortable with your retirement investing so far? Share your retirement investing experience with us in the comments.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on March 27, 2017 and has been republished on the Hub with permission.