Personal Investor: How much is enough for retirement?
This past week’s Bank of Canada interest rate hike is just the latest reminder the walls are closing in on debt-burdened Canadians. Twenty-five per cent of respondents to a recent survey conducted for CIBC said debt reduction is their number-one priority; well above the seven per cent that consider retirement saving a top priority.
The results highlight two festering problems. First, chipping away at debt will become increasingly difficult as larger portions of debt payments are swallowed up by interest. Second, neglecting retirement saving reduces the time you can contribute, and the time your investments can grow.
If debt is your first priority, pay down debt. The return on every dollar applied against debt is equal to the interest rate compounded over time, and it’s risk free. At the same time, consider planning your retirement. Planning doesn’t cost anything and it might provide an incentive to get out of the red and into the black.
Most financial websites provide online retirement calculators that will provide estimates on what you will need to save to get where you want. They might differ but the good ones will ask seven basic questions that you should ask yourself before logging on, and perhaps discuss with a financial advisor. Here they are:
Years to retirement: You may need to alter this number depending on the results.
Years in retirement: How long you will be retired is directly proportional to when you retire and – of course, how long you expect to live. Be realistic. It’s better to end up with more money than life, than more life than money.
Retirement income: You can’t determine how much you will need to live on in retirement unless you know how much you need to live on now. Some of the experts says retirees spend 60 to 80 per cent of their pre-retirement income and it diminishes as you get older.
Income sources: How much is in your registered retirement savings plan (RRSP), tax free savings account (TFSA), non-registered accounts or company pension plan? What can you expect to receive from the Canada Pension Plan (CPP) or Old Age Security (OAS)? Do you have a home or other assets to use as an income source? Do you expect to inherit assets?
Estimated contributions to retirement: This is another number that could be altered depending on the results.
Inflation: That’s a tough one. The inflation rate has been about two per cent lately, but who knows what it will be in the future. Some online calculators will suggest three per cent.
Rate of return: Another tough one that an advisor can certainly help with. This is another number that could be altered through planning and depending on how much risk you are prepared to take.