Many Canadians are concerned about inflation’s impact on retirement savings, and rightly so. Without the correct plan in place, it can be easy to miscalculate how much you will need to have a good retirement. With a new report from Aon stating that the average 45-year-old Canadian will need to accumulate $1.4 million in retirement savings to retire comfortably, people are even more concerned and confused. Is this an accurate number for Canadians to aim for? In this episode, Joe and Lindsay take a look at this report and break down everything you need to know about retirement savings.

Listen in as Joe shares how to maximize your savings rate to ensure you are saving as much as possible for retirement and the importance of speaking to a professional financial advisor if you are uncertain about anything. You will learn the benefit of diversifying your assets, how to take advantage of employer contributions to make sure you’re not leaving money on the table and why you should always pay yourself first.

What You’ll Learn In Today’s Episode:

  • How much you should have to retire comfortably.
  • How to maximize your savings rate.
  • The importance of looking into your employer’s contributions.
  • The benefit of diversifying your assets.
  • Why you should pay yourself first.
  • The importance of reviewing your expenses.

Ideas Worth Sharing:

“Not a great idea to have all of your eggs in one basket.” – Joseph Curry

“Pay yourself first.” – Joseph Curry

“If you haven’t retired yet, it’s a great time to be adding to your savings and buying stocks while they’re on sale.” – Joseph Curry

Do I Need $1 Million Dollars to Retire?

A recent article from Benefits Canada mentions a report from AON suggesting that the average 45-year-old will need 1.4 million dollars in retirement savings by age 65 if they want to retire comfortably. 1.4 million seems like an intimidating goal or far-off destination but it doesn’t have to be.

The first step on your journey is to start by determining your unique retirement goals. Once you know what you’re working towards, whether that’s 1.4 million or any other number, you can begin to work backward to chart out the journey.

If you do a Google search on whether 1 million dollars is enough to retire on, you’ll find it’s one of the most common questions that people ask. However, some variables do come into play because every situation is different. For instance, some people will be employees, some will be self-employed. Some may have a defined contribution pension and will have a guaranteed pay cheque from their pension, whereas others will have their savings in an RRSP or an investment account. People who fall into the last category need to have some amount of money in those investment accounts and the 1.4-million-dollar amount isn’t too far off as a median number or middle ground.

Something else to consider is that it’s not just about your retirement savings or retirement pensions, there are also government pensions like Canadian Pension Plan and Old Age Security to consider. In other cases, people may have a rental property or another asset that will generate income in retirement. The real question to pose is what you can do to maximize your savings rate to ensure that you have enough put away for retirement.

The first place to start is to figure out how much you should have for your retirement goals. If you’re able to figure that out on your own, that’s great. If you need to talk to an advisor to help you determine that amount, that’s a great first step too. Once you know what you’re working towards and if you feel you’re not saving enough, you can consider whether you have access to a defined contribution or a group RSP plan at work where your employer will match some % of your contributions. For example, maybe your employer will match 100% of your contribution up to 5% of your income. You will want to make sure you’re getting any kind of free money that’s on the table.

Depending on what your company looks like it may also be a publicly traded company where there might be some stock options where you can buy company stock at a discount and with the discount it is basically free money. You can take the discount if there’s a vesting period where you must hold the stock for a certain amount of time, and then maybe at a point you sell it and diversify it to something less risky.

 

One note of caution: You will be taking a lot of risks if you have all your money in your company stock and if you have only your company in your portfolio. Your job is dependent on that company as well as the industry. Having all your eggs in one basket is never a great idea. However, the free money that the stock option affords you is worth considering.

The second thing to consider is setting up a system to pay yourself first. Don’t wait until money adds up in your bank account. You should always think about paying yourself first. Again, figure out what you need to contribute towards your goals, and then automate that so that it comes out of your bank account every month as soon as you get your paycheck – and before you have a chance to spend it.

For business owners starting out, most of your money will go towards trying to grow your business but as you approach retirement it becomes important to divert risk from your business to a more diversified and lower-risk portfolio. This will help ensure a successful retirement even if you don’t get the full value from the sale of your business.

The third way to find excess cash flow for retirement savings is to evaluate your finances. For instance, if you think you’re putting all the money away that you can right now and you’re not sure where you can find more cash flow to help meet your retirement goals, consider if you get a yearly raise. You can take half of that raise and put it towards your investments for your future retirement and use the other half to increase or maintain your current lifestyle or just make sure you’re keeping up with inflation.

You may find as you’re approaching retirement that you’re making the most money you’ve ever made. You may also be in the position where your kids are done college, so now there aren’t college or university expenses, freeing up some cash flow. You can take some of that cash flow and put it towards your retirement savings before you start spending it. This will increase the savings you have for retirement, and it’s usually a good time as you’re making that final push towards retirement.

You can also go back through your expenses carefully. Not many people love budgeting, but one thing that might be worthwhile is taking time once a year, maybe even once every few months, to go back through everything you’ve spent money on in the last few months and see if there’s anything that you’re paying for but not using, like apps or subscriptions. Everything is an automated subscription now and with that we can start to forget about them. Many people are surprised when they go back through and see what they’re paying for monthly and not getting any value from. Go ahead and cancel them. Then take that money and pay yourself first by automatically diverting those savings either weekly or monthly. However, you want to make sure that it’s helping you get closer to your retirement goals without affecting your lifestyle. If you can put it away before you even notice, then it’s not affecting your day-to-day.

Let’s return to that average 45-year-old that we mentioned before. Perhaps you’re asking yourself if now the right time is to invest considering that inflation is high, the war in Ukraine, et cetera. Negative events continue to happen in the world causing stock values to decrease, but we can’t plan around those events. What we can do is we can look back over the last hundred years or so and compare. And after doing that we can see all the negative events that occurred, most of which were a surprise and had only a short-term impact on the market. If we wait until we think we have perfect certainty about what’s going on in the world and only then do we feel comfortable about putting more money into stocks, then we’ll probably be too late. A very important part of being a successful investor is having faith and discipline.

A perfect example of this is COVID. COVID markets went down quickly and then for the following year, even though markets had recovered, there were still a lot of unknowns about future lockdowns. We heard many times from clients that it wasn’t a good time to invest because of uncertainty in the world, but meanwhile, that whole year stocks were having one of the biggest upswings we’ve ever seen. The whole idea is that the uncertainties or negative events that might come up, and expectations surrounding this, have already been considered by markets. What’s more likely to happen, like what we saw with COVID, is things get better and the market gets ahead of anybody who’s investing based on that good information. It’s what is called a leading indicator. As soon as the good news is happening, markets are already moving up and by then we can’t get ahead of them. At the end of the day, if markets are down or don’t look good right now, and especially if you haven’t set a retirement date, it’s a great time to add to your savings, increasing the amount you’re saving, and buying stocks while they’re on sale.

To summarize: The first step on the journey is to figure out what your financial target is. And if you need to work with someone to figure that out, make sure you do that. The second step is to pay yourself first. The third is every time you get a pay increase, or you cut an expense of any kind, shift it to your cash flow and take advantage of at least some of that excess cash flow to put towards paying yourself first. Lastly, make sure you’re not leaving any free money on the table when it comes to situations like employee matching programs for retirement savings.

Let’s face it, 1.4 million may seem like a far-off or near-impossible destination. However, with careful planning when it comes to retirement, it is possible. Keep in mind planning for retirement is both about the journey but with a firm eye on the destination.

Resources In Today’s Episode:

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