In your 20s and 30s, retirement is so far away that you can barely see it on the horizon. The best way to get there is to save what you can afford – say 10 per cent of your income – and then readjust your financial compass as you get closer and have more information.
You might start the journey with the idea that you need a million dollars or more once you reach your destination. To get to one million by age 65, a 30-year-old would need to save $8,500 per year for 35 years, assuming a 6 per cent annual return.
Saving for Retirement
It’s not easy to save $700+ per month in your thirties. Competing priorities like a mortgage, car payments, and raising children often means that retirement savings are put on hold. Put off saving until you reach 40 and you’re now faced with the daunting task of saving more than $1,400 per month for the next 25 years to reach that million dollar mark.
Some might feel it’s prudent to pay off the mortgage and max out children’s RESPs before ramping up their own retirement savings. By age 50, most of those obligations should be taken care of which should now free up significant cash flow to save for retirement. It’ll need to be significant to reach a million. With only 15 years to go now, compound interest is not on your side, and so you’ll need to save nearly $3,400 per month – or $40,000 per year – to get to your retirement goal.
A tempting alternative at this point is to adjust your expected rate of return. After all, with an 8 per cent return you’d only need to save $2,800 per month, and at 10 per cent you’d need to put away less than $2,400 per month.
But the more realistic approach would be to adjust your expected retirement age and then figure out if a million dollars is really the amount you need to enjoy a comfortable retirement. You’d be surprised to learn you can live off much less.
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For example, let’s say you decide to work until 68 and then retire with a $510,000 portfolio. Assuming you’ll live to age 90 and your portfolio continues to earn 6 per cent, you can comfortably withdraw $40,000 per year. That doesn’t include CPP or OAS payments to supplement your retirement, so figure to add another $12,000 to your annual income.
It sounds reasonable to live on $4,333 per month in retirement when you consider that you should be mortgage free and your children financially independent by now. You’ll no longer be saving for retirement, either, so you’ll be free of another big monthly expense.
Finally, a paid-for home can be tapped for income through a line of credit, reverse mortgage, or, more likely, sold as you downsize or decide to rent. Although downsizing might not leave you with as big a nest egg as you think, even $100,000 can add a comfortable buffer to existing retirement plans.
Final thoughts
How much do you need to save for retirement? It’s impossible to know for sure, but by developing good saving habits early on you’ll be in a better position to make those course corrections along the way.
We started years ago with a modest 6-8 per cent of our income and now save close to 25 per cent of our income for retirement. Full-stop retirement is still a couple of decades away, however, and so as our goals become closer to reality we’ll be able to adjust how much we save for retirement (higher or lower), our expected rate of return, as well as our retirement date.
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Don’t despair if that million dollar goal seems unattainable. It’s possible to retire comfortably on much less.
In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on July 16th and is republished here with his permission.