BY: FAZAAD BACCHUS
Many Canadians are so caught up with daily living expenses that thinking of saving for retirement is one of the things that they tend to put off until later, much later in life. The average individual typical starts thinking about his retirement somewhere around age 45 to 50 and wonders how much he will need to save. The young person believes that he has many years ahead before retirement so why think of it now.
Consider the pre-retiree (aged 55) who is currently earning $50,000 per year and wants to retire at age 65. Normally most employees would like to or need to retire on approximately 70% of their income. In our case, the pre-retiree needs $35,000 per year pre-tax. To be able to generate this amount of money we will assume that he is receiving a maximum Canada Pension Plan benefit of $1,134.00 per month, an Old Age Security payment of $536.00 per month. This totals $1,670.00 in income but there is a shortfall of $1,246.00 every month.
So, at age 55, our pre-retiree decides that he would need to boost his retirement savings. But how much does he need to boost it by or how much should he save? Well, let’s look at his expected lifespan, his family’s longevity, and his current health. Most Canadians today are expected to live to age 85 and beyond, so for the purpose of this exercise we will focus on age 85. That’s 20 years in retirement and if we take interest out of our equation, he will need just about $300,000 in savings. If we factor an interest rate of 3.5% during retirement, then our retiree will need to have saved $217,000 approximately.
Our pre-retiree aged 55 has 10 years to save $217,000. If we take interest out of the equation, he needs to save $21,700 every year, if we add an interest rate of approximately 5% he will need to save $17,252 per year. As you can see, this is almost impossible for our pre-retiree to do. So here he is now faced with the challenge of reducing his lifestyle at retirement because he did not start to save early.
When our pre-retiree was aged 30 he did not think of retirement because as we said earlier, it was too far away. At this stage of his life, he was busy raising a family, paying a mortgage and traveling etc. By the time he became 40 he knew it was important but, he had to pay for the kid’s education so again retirement planning was put on the back burner. How different things could have been had he started saving earlier. In life, we need to plan specifically for our “golden years”, these are years where we will not physically earn an income but have made provisions to ensure that we don’t make them “yearning years.”
Could our pre-retiree not save $200.00 per month for his retirement from age 30? Had he done so, he would have reached his savings goal. Instead of $17,252 per year at age 55 he only needed to save $2,400 per year at age 30. This is the magic of compound interest. Start your retirement plan early, get a good interest rate and watch your money grow.
