There’s been a lot of talk lately about how everyone needs to hit a certain “number” before they can retire comfortably—a number that is, frankly, intimidating to many Canadians. Is it true?
Your so-called “number” or retirement savings threshold won’t come from a simple formula. Contrary to what some may think, the same number doesn’t apply to everyone and will probably change as your life evolves.
We all have different lifestyle goals for our retirement years. Some want to spend their later years travelling the world, others want to stay at home and tend the garden, and yet others plan to work indefinitely at a job they love.
In each case, different savings are required and a number of variables, ranging from spousal contributions to your health status, can affect the amounts needed.
Advocates of the “number” often refer to a 2010 study by the C.D. Howe Institute that suggested most Canadians who want to retire at age 65 and replace 70 per cent of their working incomes must save 10 to 21 per cent of pre-tax earnings every year for 35 years. That can be a daunting goal for many people who find it challenging to save even 10 per cent of their paycheque.
A 70-per-cent income replacement goal is a “gold standard” and many can be quite comfortable having 50 to 60 per cent of their income in retirement.
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Smart savings and investment choices today are critical to ensuring you have access to a secure post-retirement income. It is also true the longer you delay saving for retirement, the more money you will need to set aside in later years. So, how do you take the first step toward figuring out what your retirement savings goal should be?
Working with an adviser can help. Rather than worry about achieving a single large number, an adviser will take a structured approach to figuring out what you need to be comfortable at various points in your life. His or her questions will range from “How will I generate income in retirement?” to “How will inflation and taxes affect my lifestyle?”
To figure out what you need to save now, an adviser will help create a customized plan to reduce your risk for the years to come. For many, the simplest step is to open an RRSP or TFSA and apply a structured approach saving a little each month. Your adviser should also help educate you on managing money as you near and after retirement.
It is important, for example, to understand the effects of inflation and identify safe withdrawal rates that account for today’s longer life-spans. As you age, your adviser should also help you avoid high risks and keep investment costs and taxes low.
To create your own investment strategy, speak with an adviser to begin taking small steps toward your future retirement or other life goals.
Deborah Leahy is a financial adviser with Edward Jones, member Canadian Investor Protection Fund