How much money do you need to RETIRE?

1.7 MILLION LOONIES

Yes, that’s right! According to a recent BMO survey, that’s how much money Canadians believe they need in their piggy bank in order for them to retire. It is important to note, the definition of retirement will vary amongst individuals, however, traditionally, retirement means ceasing to work so you can stay at home and annoy your spouse. Which typically leads to pulling a Tom Brady, and retiring from retirement.

Luckily for us, @wealthsimple conjured up some excellent graphics and did the math on what it would take to hit that goal of $1.7 million by the typical retirement age, 65.

Moneysense corroborated the findings in this article.

Let’s face it, most of us have been heavily influenced by our parents in multiple areas of our lives. Whether it be our interests in food, clothing, the neighbourhood we live in, or even the car we drive, our decisions relate to our childhood beliefs. Money is no exception. If your parents were spenders, you are more likely to be a spender, if they were mattress stuffers, you more than likely will save, and if they were investors, you guessed it, you’re likely to be an investor.

This begs the question if you want to retire, and I’m assuming you do if you are reading this, which method (spending or saving) will allow you to reach your goal and get there sooner?

Let’s turn to the handy dandy research WEALTHSIMPLE has conducted to answer the question.

INVESTING > SAVING

“If you want to sock away enough money for retirement, investing, rather than sticking your cash in a savings account, is probably the way to go. That’s because, though no future outcome is certain, the stock market has historically grown 7% a year on average, while high-interest savings accounts tend to return 3%. So, going back to our $1.7 million benchmark: you could reach it by contributing $15,700 into a retirement account each year. We calculated that based on a 35-year investment horizon since that’s how long folks in their early 30s have; we also assumed a $52,000 savings baseline since that’s about average for that age group. Don’t get us wrong: $15,700 is a lot.* But it’s a lot less than the $31,560 you’d need to contribute annually to hit $1.7 million if you kept all your money in a savings account

** And, as the chart shows, if you saved, rather than invested, $15,700/year, you’d retire with $726,000 — a million short of your goal. No dice.

*Our chart accounts for inflation, so you’d actually end up with more than $1.7M when you retire, but you’d have the equivalent of $1.7M in buying power today.” 1

Please note that the slope of the line and in turn your amount invested and return generated will change based on a multitude of variables. The largest ones are the age you started investing, the amount you started with, the amount you contribute regularly, and the rate of return you consistently earn.

START ASAP, CONTRIBUTE OFTEN

“OK, so what if you’re not 30, as the first chart assumes? And what if you don’t have any savings, much less $52,000? How can you reach $1.7 million then? The answer hinges largely on time. If you’re 25, the power of compounding returns is definitely on your side: if you want to retire at age 65, an annual $14,073 contribution over the next 40 years should get you to $1.7 million. (Congrats!) With every year you put off investing, though, your goal gets a lot more, let’s say, ambitious.

The point being: it’s crucial to invest as early as you can, since the money you invest now will earn more over time than money you invest later. And, if you’re panicking about not having enough time or money to save for retirement, remember that how much you need really depends on how much you expect to spend. You can use a retirement calculator to get a better picture of where you are and how much you might need.”1

The message here is clear and simple, start investing now. Don’t wait, and if you plan on waiting, be prepared to contribute a lot more per year to make up for the years of not investing. That is if you do want to retire.

If the average Canadian requires $1.7million to retire, let’s take a snapshot of where we stand in our net worth (assets—liabilities). Spring Financial released the median (the mean would skew towards the high net worth individuals) net worth of Canadians earlier this year. It is a sobering series of graphics. Our net worth tends to increase until age 55-64 and then steeply declines. This is likely explained by retirement and continued drawing down of reserves. Usually, this is because typical retirees do not have other revenue streams savings naturally erode. Another feather in the cap of creating multiple revenue streams. The last graphic illustrates the net worth of certain geographies of Canada. The discrepancies can be tied to a variety of factors (cost of living, employment opportunities, population size etc).

Take-home point: Take action, invest early and often, and develop multiple revenue streams. Anything above zero compounds.

If you're interested in learning more about getting your financial house in order and how to set up your financial life, please consider registering for the recorded beginner course.