How Much Money Do I Need To Retire In Canada In 2021
In the retirement series, I wrote about the Canada Pension Plan, RRSPs, Old Age Security, and other employment pension plans.
Taking it a step further, I want to address a question Iâve often asked myself :
How much money do I need to have saved up before I retire?
How can I retire at age 50, 55, 60, or 65 years old?
How much income will I need in retirement?
or more specifically: How much money do I need to retire in Canada?
These, of course, are important questions!
As you grow older, you start to wonder if youâre putting aside enough money for retirement and if your retirement nest egg will hold up when you finally do retire.
While I do not have all the answers, Iâll take a stab at providing an answer that hopefully gets you started on the road to arriving at the magic number or multiple that works for you.
Separate Needs And Wants
Fish then advises another step in creating lifetime income in retirement separating ones needs versus ones wants. This type of retirement income strategy is also called a Flooring Retirement Income Strategy or essential vs discretionary.
Your income for your retirement spending needs should come from a secure income source. While money earmarked for your wants can have more risk associated with it.
We simply figure out the basic needs or the must haves, and calculate how much is needed on a monthly basis, Fish offers.
We calculate the monthly need and back out what is provided by social security and pension, if applicable. We may utilize a fixed or variable annuity to get to the needed lifetime income, and then use a total return strategy to determine the discretionary expenses, or the want to haves this could be a four to five percent withdrawal off of principal and is looked at annually to determine the proper amount to take off.
That money is moved to cash, so the money for the next year is there to spend and not subject to market fluctuations, Fish says. If we have a bad year in the market, the discretionary expenses can be adjusted.
Of course, it is important to remember that your needs and wants will evolve throughout your retirement. Explore the different phases of retirement and how they impact your spending.
Level 2 Financial Planners
One step up the Ladder of Retirement Estimations are the supposed most expert of money experts, The Financial Planners. These guys live for the scares more than a minimum wage teenager working a haunted house.
Ask the average CFP how much money the typical person needs to comfortably retire, and theyll do some hand waving before throwing out a devastatingly large number usually in the range of about three million dollars.
The exercise usually goes something like this:
Armed with this process, the financial planner runs the number for John and Jane Doe. John is a firefighter earning $50,000 per year, while Jane is marketer earning $60,000 at her office job.
Wait, what?
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Retirement Income Calculation Rules Of Thumb
When it comes to income required in retirement in Canada, there are several rules of thumb or schools of thought out there. If you are looking for a definite answer to put your mind at rest, you may be disappointed.
In fact, the one thing everyone readily agrees to is that when it comes to retirement income, it is not black and white and there is no 100% consensus.
Popular rules of thumb include:
In Our Experience Many Have Saved Enough Money To Retire Comfortably Yet Too Many Worry About Their Money Running Out And Want More Maybe Its Time To Ask Yourself How Much Is Enough
Nearly six out of 10 Americans fear running out of money more than death, according to a 2019 survey by AIG Life & Retirement. Weve seen this play out with our own clients. Many have saved enough money to last 30-40 years, yet some still pinch pennies as if they are going bankrupt.
One particular couple comes to mind, a retired doctor and teacher. Their income from a pension and Social Security is nearly $100,000 annually about the same amount as their annual expenses. They dont touch their investment account of approximately $2 million yet they still worry they are spending more than they should. For example, just before the pandemic, they asked if they could afford to take a Mediterranean cruise that would cost around $10,000. Of course, they could.
If 2020 has taught us anything, its how precious life is. In the past year alone, weve lost clients to cancer, unexpected medical complications, heart attack and COVID-19. Last year gave all of us a wake-up call to ask what is really important in life. When it comes to money, the question is, How Much Is Enough? While the answer is different for each of us, the facts show it may be less than you think.
Here are our recommendations to create peace of mind that you have enough:
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How Much Do You Need To Retire Comfortably In Australia
Calculate how much money you might have, how long it will last and how much youll need in retirement, with our retirement calculators
Working out how much is enough for retirement depends on many factors, such as your lifestyle, plans for the future, and the number of years youll spend retired. Additionally, estimating how much youll have when you plan to retire depends on factors such as your current salary, super balance and assets. With so many factors, its easy to see why you might need a retirement calculator to get an idea of your retirement savings needs.
By using our helpful retirement calculators, you can get an indication of whether theres a shortfall between how much you are estimated to have and how much youll need in retirement, and put a plan in place to address the situation.
Asset Allocation Can Have A Big Impact On A Portfolios Ending Balance
Assumes a constant asset allocation, a 75% confidence level, and withdrawals growing by a constant 2.47% over 30 years. Assumes a starting balance of $1 million. Confidence level is defined as the number of times the portfolio ended with a balance greater than zero. See disclosures for additional disclosures on allocations and capital market estimates. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees.
Remember, choosing an appropriate mix of investments may not be just a mathematical decision. Research shows that the pain of losses exceeds the pleasure in gains, and this effect can be magnified in retirement. Picking an allocation you’re comfortable with, especially in the event of a bear market, not just the one with the greatest possibility to increase the potential ending asset balance, is important.
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Supplemental Retirement Income Is Key
Three million dollars is enough to retire comfortably. However, I suggest generating supplemental retirement income in retirement to make your three million dollars last longer. Supplemental retirement income can include consulting, teaching, doing something entrepreneurial online, gig work, etc.
You just never know how your health, tastes, and needs change in retirement. Further, while in retirement, its nice to stay active. A lot of people I know who retire with $3 million feel a sense of loss if they arent retiring to something.
Below are my latest passive income streams. Notice how most of my passive income comes from investments. However, I do earn roughly $45,000 a year from a severance negotiation book I wrote in 2012. I just keep updating the book every couple of years.
Further, on June 28, 2022, I will be publishing my second book entitled Buy This, Not That: How To Spend Your Way To Financial Freedom. It took two years to write and is with Portfolio Penguin Random House, the largest publisher in the world. Perhaps this book will generate passive royalties once my book advance is reached.
My main sources of retirement income include municipal bonds, dividend stocks, three rental properties, and 18 real estate crowdfunding investments across the country. My favorite real estate crowdfunding platforms are CrowdStreet and Fundrise. Both are free to sign up and explore.
Retirement Calculator: How We Got Here
Our free calculator predicts your retirement nest egg, and then estimates how it would stretch over your retirement in todays dollars, taking inflation into account. Our default assumptions include:
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A 3% inflation rate.
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Salary increases of 2% per year.
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A 5% rate of return in retirement .
Enter your age, income, current savings and monthly savings rate to see how you’re doing. If you wish, you can enter more details in the Optional settings, such as your expected rate of return before retirement and what you expect from Social Security . You can also fine-tune your retirement spending level, retirement age and more.
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Predicting Your Rate Of Returns
As far as rate of return, you get to decide how youll invest your money. If you have a basic 401, you usually have options of types of funds based on your risk tolerance.
While you cant control the markets, you can choose the types of investments to make, which impacts your overall returns. After reaching that total, your interest on 3 million dollars can fund however many years you need it to.
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Case Study : $2 Million Portfolio With $4000 After
In scenario two, Joe and Mary withdraw $4,000 per month from their $2 million portfolio. This is an increase of 33.33% from case study 1.
This is income they will need above and beyond any other sources such as social security or pensions. The money must last until they each reach age 95.
Here are some additional assumptions for case study 2:
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Starting portfolio value: $2 million dollars
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After-tax portfolio income per month: $4,000
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Retirement age: 60
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Retirement start date: January 1, 2021
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Retirement time horizon: 35 years
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Portfolio mix: 60% stocks 40% bonds
Monte Carlo Simulation shows that the probability of the money lasting through retirement decreases to 87%.
This is not a low probability. But, probability of success decreased from scenario two due to the increase in retirement income drawdown.
Figure 2
Curious about having us help you plan for retirement? You can learn more here. If youâd like to learn more about avoiding big money mistakes in retirement, we provide a selection of powerful ebooks, guides, and checklists.
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Investing Your Money Is A Smart Move For Retirement
If you want to be able to retire with a lot of money on your hands, then investing your money is the way to go. Sure, you can just save your money each month to a retirement fund. However, that money will just sit there and do nothing.
Do not forget that saving money can also be a difficult thing to do. You will end up using that money when something important suddenly comes up. And that is why you should consider investing your money.
Is $2 Million Enough To Retire At 60
Is $2 million enough to retire at 60? It’s an important question to ask.
Yes, for some people, $2 million should be more than enough to retire. For others, $2 million may not even scratch the surface.
The answer depends on your personal situation and there are lot of challenges you’ll face.
Research shows that the fear of outliving retirement savings is one of the biggest concerns crippling pre-retirees and new retirees alike.
Even with a free cheat sheet, making your $2 million portfolio last through retirement is hard.
But, the significance of making sure $2 million is enough to retire becomes even more important at age 60.
Free Tip: A lot readers ask us how to get started with making money last in retirement. To help, . They may help save you time and money!
Why?
With improvements in healthcare, people are living longer. That means you’ll need to plan for at least 30 years or more of sustainable portfolio income.
Even worse, social security benefits may only cover 20-40% of your income in retirement.
And many smart retirees delay taking social security until age seventy to maximize benefits.
As a result, annual income need from your $2 million portfolio can be much higher from age 60 to 70. At least until you start taking social security.
So, while two million dollars may seem like a lot, there are many hurdles to jump over in retirement to make sure your money lasts the rest of your life.
What You Will Learn:
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Canadians: Do You Really Need $1 Million To Retire
With great income-producing stocks like Crombie REIT , you wont need $1 million to retire.
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Weve all heard the talking heads on TV and read the articles in magazines. Without at least $1 million invested, were destined to live our golden years, struggling to afford even the basic necessities of life. Or so they say, anyway.
Ive always questioned this wisdom. There are several reasons why retired folks may end up needing less than they think.
Firstly, expenses will decrease. Youll no longer have an expensive commute to work or have to shell out for business casual clothes. And, perhaps most importantly, youll no longer have to save for retirement. That alone can easily put an extra $500 or $1,000 per month into your back pocket. The mortgage will likely be paid off by then, too.
Then theres the motivation of the pundits. These folks often work for mutual funds or banks, companies that have a vested interest in upping assets under management. Its good for business, after all. Yes, most people want to leave an inheritance. But its silly to save more than $1 million when less than that will do. That cash should be spent, not hoarded.
Many also forget about how much Canada Pension Plan and Old Age Security earnings will help the average person retire. The average Canadian couple can look forward to approximately $2,500 per month in payments from these two sources. Thats a great start right there.
How To Increase Your Social Security Income
What is the best way to get more Social Security income? Postpone collecting your benefits until at least full retirement age or longer to get the maximum monthly payment. Delaying the start of Social Security can mean a BIG boost to your overall retirement wealth.
And, more and more retirees are getting the message. It used to be that the most popular age to start benefits was 62. However, now the most popular age for men to start benefits is 66 with 36% starting benefits at that age, followed closely by age 62 with 27% starting at this early age. The most popular age for women to start is a tie. Thirty-one percent of women start at 62 and another 31% start at 66.
Plan for Your Spouses Income, Not Just Your Own: If you are married, it is especially important that the higher earning spouse defers the start of benefits for as long as possible. As you saw above, retirement income for people living on their own is extremely low.
You can help mitigate that problem with the right claiming strategy. Learn more about smart strategies for Social Security if you are married.
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Level 3 Putting The Safe Withdrawal Rate Into Action
Putting The 4 Percent rule into action is pretty easy, and serves to really KO the myth of the $3 million retirement. Simply multiply your annual expenses in retirement times 25, and youve got a quick and dirty retirement number.
For our previously mentioned frugal spender living off just $1,000 a month, a $300,000 portfolio should safely survive retirement.
For a financial analyst and free time blogger planning to live off $30,000 per year, $750,000 is his magic number.
Unfortunately, Johnny Depp needs a portfolio of about $600 million to keep up his current lifestyle. Sorry, Captain Jack.
Is the 4 percent rule exact? No. Is it bullet proof? Of course not.
But neither is throwing out a random multi-million dollar guess, and neither is a financial planner multiplying your annual income to arrive at a massively bloated number.
What Is The Average Retirement Income For 2021
Reporting on average retirement income can be tricky. The best income data does not include information about whether someone is officially retired or not. Retirement has no official definition with many retirees still working. Retirement is more of a mindset these days. However, for these purposes, well start with statistics for those over 65.
The average retirement income numbers for Americans over 65 seen below comes from the US Census Bureau. The most recent data available is from 2019 and compiled in 2020. So, all of the economic changes we have seen over the last year are not necessarily represented in the data below. However, the following numbers should be very close to reality for the average household
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