Finance Bootcamp: Don’t Wait to Plan for Retirement!
Sometimes, in the middle of the night, I wake up with a start--a cold sweat trickling down my temple. No, it's not because I have nightmares about falling, or that an axe murderer is chasing me. Nope, what keeps me up at night is the thought of not being able to retire when I’m 65.
No vacations to Florida and Caribbean cruises
No hot nights at the BINGO hall
No golf (okay, I don’t even play golf, but work with me here...)
As such, I’m constantly re-evaluating my retirement strategy. You know how some people knit or bake to de-stress? I tinker with my budgeting and investment spreadsheets, running what if? scenarios to see how much I can retire with if I contribute X amount, at Y interest rate, over Z years (we’ll get to this later).
It’s surprising to see how many of us are kind of clueless about investment and retirement planning. I have friends, men and women, with well-paying careers who openly admit to spending 100% of their income on the good life (glass condo in the sky, high-end dinners, and luxury vacations twice a year...) without a regard to retirement.
Yes, I totally believe in indulgence and the finer things in life (in fact, my next session is all about luxurious living on a budget), but it’s always a good idea to prepare for your own what if? scenarios.
When I ask some of these friends why they don’t plan for retirement, they usually reply with, “M, we’re in our 20s, relax!” or “I think my job has retirement benefits” or “I’m the sole heir of grandma Betsy’s entire estate!” or “Meh, the government will take care of me, that’s why we pay taxes!”
I know, sometimes it sounds like I’m repeating myself, but just as you could easily win the lottery, you could easily live to be 100 years old. Even if you retire at 65 (or 70, nowadays...), you have 35 years of living expenses that you will need in your non-working years. Also, don’t assume anything about the future, as we learned from the Great Recession, the good times can’t last forever, and you don’t want to be caught unprepared.
So, assuming you can’t rely on a corporate pension plan, or nana’s inheritance, how much SHOULD you put away? It depends on when you want to retire, how much money you can live on in retirement, and what you can afford to put away right now.
Assuming you have minimal consumer debt (i.e., you don’t have three maxed out credit cards), take a look at your budget to determine how much you can afford to contribute to a stable, diversified (lower market risk), tax-friendly investment vehicle, such as a mutual fund in an RRSP or TFSA. Almost all of the major bank websites have tools that allow you to calculate how much you need to contribute to retire at your desired age.
For example, using my own bank’s website, I decided that:
I want to retire at 65 years old. My only other income will be the Canadian Pension Plan and Old Age Security government benefits, which might equal a reasonable 25% of my post-retirement income, and I think I’ll need $30,000 (assuming my mortgage is paid off) per year to have a comfortable retirement.
According to the calculator, if I start contributing to a Retirement Savings Plan at age 30, expect 2% inflation and an investment return at 6%, I’ll need to start putting away about $660 a month that will equal $1,160,263 in 30 years.
At my current income, $660 is rather a lot, until I realize that I spend more than that on entertainment, restaurants and nights out. If I arrange to have $330 taken off of each biweekly paycheque, then I’ll be forced to save the money.
Lower income workers might be discouraged to save, but if someone has the skills to stretch their incomes now, then that person should have no problems applying their resourcefulness and frugality to a smaller retirement income. Bottom line: don’t wait to start saving and investing for retirement.
Whether you’re self-employed, or a company-woman, saving for retirement outside of a government or company plan will ensure that you have your own safety net in retirement.
Written by M. Alice Allen
Session 6:
The Art of the Side Hustle
Session 5:
Finance Bootcamp: Deciphering and Taking Advantage of Your Company's Benefits Plan
Session 4:
Finance Bootcamp: The ABCs of RRSPs and TFSAs
Session 3:
Finance Bootcamp: The ABCs of RRSPs and TFSAs
Session 2:
Finance Bootcamp: Tracking Your Expenses and the B-Word
Session 1:Finance Bootcamp: Digging Yourself Out of That (Debt) Hole