Retirement Reality Check: Why You May Not Need $1.7 Million to Retire
Canadians now believe they need to be millionaires to retire — a goal financial planners chalk up to a myth.
BMO’s Annual Retirement Survey found that Canadians estimate they’ll need an average of $1.7 million to retire comfortably — up from about $1.54 million last year. Ontario residents believe they’ll need even more — roughly $1.9 million.
“They’re obviously not getting a good metric,” says Adam Bornn, certified financial planner and managing partner at Parallel Wealth, who adds he doesn’t understand where the $1.7-million figure came from. When a number like that is thrown out, “people think they can never retire. It crushes people.”
Moshe Milevsky, finance professor at York University’s Schulich School of Business, calls the $1.7-million target unhelpful and unrealistic. There is a magic number to aim for, but it’s not total savings, Milevsky says; it’s how much annual income you’ll need during retirement.
“They’re looking at the level of wealth as opposed to income. They are focusing on value instead of cash flow,” he explains.
Understanding what your monthly cash flow will look like
“Chasing a big round number can create unnecessary fear and paralysis,” says Anna Golan-Reznick, certified financial planner at Objective Financial Partners. The $1.7-million figure assumes that everyone has the same income, lifestyle, housing costs and access to government benefits, she says, which is not the case. “You don’t really retire on a lump sum. You retire on a stream of income.”
Instead of wondering if you’re rich enough to retire, Golan-Reznick says, figure out what kind of retirement your resources can support. “Once you frame it that way, the conversation becomes much less intimidating,” she says.
To get a handle on what kind of monthly income you’ll need to live comfortably during retirement, look at your current expenses versus what your expected expenses will be in retirement. “You’re looking at, ‘What do I have now and how are those expenses going to evolve over time? Am I still going to have the mortgage? Are the kids still going be here? Do we need two cars?’ ” says Chris Jardine, family wealth adviser at Bellwether Investment Management.
Bornn says the average middle- to upper-class Canadian needs about $6,000 to $7,000 a month after tax, but understanding what kind of monthly income you’ll want to aim for will depend on the kind of lifestyle you want to live.
“If you live in Nova Scotia, you never eat out and you don’t travel, you might only need $2,000 or $3,000 a month,” Bornn says. “Whereas if I’m in B.C. and I love to travel, I might need $10,000 a month.”
You can work backwards to figure out how much money you’ll need to guarantee that income and where it will come from. Figuring out how much you’ll receive from CPP and OAS — which provide guaranteed, inflation-adjusted income for life — is key.
Golan-Reznick says many Canadians underestimate the role of CPP and OAS. These benefits reduce how much savings you’ll need, she explains. For example, for a couple where both spouses have strong contribution histories, CPP and OAS together can provide around $35,000 to $40,000 per year.
Other factors you’ll want to consider: Do you have a workplace pension plan? RRSPs? Will your home be paid off or will you still have a mortgage?
Once you understand the income you’re going to have, Jardine says, you can then figure out what you’ll need to make up the difference between where you’re at and what you want to spend, and how that will evolve over time.
If you’re used to a high standard of living, you don’t have full CPP and OAS benefits or you don’t have a pension, you’ll need more income to supplement your retirement years.
Plan for go-go, slow-go and no-go years
It’s a common misconception that you’ll spend the same amount when you’re 65 as you will when you’re 95, Jardine says, adding that “a 65-year-old is typically a lot more active than a 95-year old.”
Bornn points out that there are typically three stages of spending during retirement: go-go years, from age 60 to 75, where you’ll be more active and likely spend more; slow-go, from age 75 to 85, where you’ll start to spend less (on travel, driving, etc.); then no-go from age 85 onward, where you’re really not spending a lot.
It’s important to think about your family’s health history and what kind of longevity you may be looking at. “If your parents and grandparents made it to their centenarian birthday, you’re looking at a much longer time horizon,” Milevsky says.
If you expect to live longer than the average Canadian, consider delaying CPP and OAS until age 70 to boost your monthly payments.
Do a pulse check five years out from retirement
“Would you ever take a trip and not plan for it?” Bornn asks. “You know where the airplane is going, but you don’t have a place to stay, you don’t have food, nothing’s planned. That’s how most people walk into retirement,” he says.
Bornn suggests sitting down with a financial planner when you’re five to 10 years from retiring to find out where you are in the process. “If I’m 55 and I plan to retire at 60, I want to know, am I off track? Do I need to do anything different? Could I retire early?”
Unfortunately, Bornn says, a lot of Canadians wait until they’re a week away from retirement to consult with a financial planner. In some cases, these people find out that they could have actually retired years earlier.
If you find out that you’re short on saving for your retirement goals, you can decide whether you want to adjust your retirement plans or consider working for another year or two.
“You need to make sure you take care of yourself and part of that is making sure you have a plan,” Bornn says.
Half of the clients he and his colleagues guide in retirement planning have less than $1 million budgeted, Bornn says, adding that 99 per cent of those people enjoy a comfortable lifestyle.
“People are fearful of running out of money, which is a great fear to have,” Bornn says. “But that fear can be taken away very quickly by just having a plan in place.”
This article was first reported by The Star
