"I need $1 million to retire " and 5 other popular retirement theories that need a rethink
Six popular retirement theories are unlikely to fit all investors at all times, according to a report issued today by BMO Financial Group's director of retirement strategies, Dina Di Vito [pictured.]
Here, reordered, is the list:
1.) "I've heard I need to save $1 million."
Clearly, some can get by on less but others will be hard pressed to live on the income spun out from $1 million of capital. Di Vito says the $1 million figure is based on the assumption you should save 20 to 25 times the annual income you will need once retired. So if you need after-tax income of $50,000 a year, 20 times that is that magic $1 million. If you can't live on $50,000, then clearly you need to rethink this old guideline. Of course, you may need even less if you have a company pension plan and government pensions. If so, you may need just $400,000 in personal savings: 20 times $20,000.
2.) "I am fine. I have a company pension plan."
To start with, only 38% are "fine" because the other 62% of paid workers don't have an employer-sponsored pension plan. Even old-fashioned Defined Benefit plans may not be fine if they're not indexed to inflation, or — as in the case of Nortel Networks — the company faces bankruptcy and didn't make all required contributions to the plan. Then again, you may be in a Defined Contribution plan, which is subject to market volatility just like RRSPs and non-registered stock portfolios.
3.) "I need 70 to 80% of my pre-retirement income."
This generalization resembles the $1 million myth. Those accustomed to a modest lifestyle may, as Malcolm Hamilton often says, be able to get by on 50% or less of the income they enjoyed in their working years. But big earners used to making several hundred thousand a year and not saving any of it may find themselves hardpressed to replace even a fraction of what they once earned. In between are the majority that can probably get by at 70 to 90% but even there, when people first retire they often indulge in a sort of honeymoon where they do all the things they put off doing while working. That can easily put them past the 100% replacement level in the first few years of retirement, Di Vito says.
4.) "I will have enough with the CPP/QPP and Old Age Security payments from the government."
This one evokes the TD poll cited earlier today that many Canadians hope the CPP or a lottery win will absolve them of the need to save in RRSPs or TFSAs. Again, for the very poor who are accustomed to living a minimal lifestyle, it may be true that the CPP/OAS/GIS combo may be enough. The same Malcolm Hamilton (an actuary with Mercer's) has said a senior couple who "never worked a day in their life or saved a penny" could get a joint income of $20,000 a year once they reach 65 through OAS and the Guaranteed Income Supplement to the OAS, plus some provincial programs. How they reach that age without having worked or earned money is another question but the point remains that for most of us, CPP/OAS/GIS is just one leg of a three-legged stool that should also include employer pensions and personal savings (RRSP/TFSA/non registered investments.)
5.) "I will be fine if I only withdraw 4 or 5% a year from my savings once I retire."
This may be so if you expect to live in retirement for 30 years and if you can even earn 4 or 5% in conservative investments. Given today's interest rates, you may earn less than the amount you're withdrawing, in which case "you will have a higher risk of running out of money during retirement," Di Vito says. Then again, those with RRIFs or Registered Retirement Income Funds are eventually required to withdraw more than 5% every year, and pay tax on it. At 71, the minimum rises to 7.38% and rises from there, eventually hitting 20% a year by your mid 90s. Fortunately, this can be somewhat mitigated by pumping the post-tax withdrawals back into a TFSA: to the tune of $5,000 a year per person, hopefully indexed to inflation as the years go by.
6.) "Delaying my retirement a few years will not make that much of a difference."
No, delaying it can make a huge difference, apart from the social and mental benefits of working as long as you can. Even a few years can make a big difference to your nest egg and how long it will last: remember that in addition to the extra earnings achieved by working longer, there will be that many fewer years to withdraw. That makes for a powerful positive "double whammy." Di Vito cites the example of $400,000 intended to pay an after-tax inflation-indexed $20,000 a year between ages 60 and 90. She assumes a 6% rate of return made up of 2% interest, 2% dividends and 2% capital gains, with inflation also at 2%.
By deferring retirement just two years to age 62, the $20,000 a year rises to $22,500 a year, or 12.5% more annual income.
Which perhaps is why I generally end this blog with the numeral "62."
As I do now:
–62–
Source The Wealthy Boomer : Retirement
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