Category Archives: Retirement

How Much Money Should You Save For Retirement?

By: GenXinvestor

RetirementHow Much Money Should You Save For Retirement?  Now that tax season is behind us for another year and people have made those last minute contributions to their retirement accounts, I thought it would be a good time to look at how much money you should save for retirement.  This question can be a little tricky and no, I’m not gonna offer up a bunch of retirement calculators.

From a financial perspective, retirement requires a long term plan.  Further complicating matters is that this long term plan will be unique to each person’s financial situation.  Most personal finance experts will say that it depends on our lifestyle and how much money we spend.  It also has to do with some very important assumptions that we build into our retirement plan.  Things like whether or not you’ll have a mortgage or if you plan on traveling a lot can significantly impact the quality of your retirement.

The truth is that there is no magic number of how much each of us needs to save to retire.  There are, however, some general rules of thumb that can help us get a sense of how much we need to be saving.  Here are 3 perspectives on the matter:

William Bernstein wrote in his book If You Can that young people should save 15% of their income throughout their working lives.  His assumption was that people could reasonably expect to achieve a 5% real return after things like inflation and fees.  Bernstein’s approach accounted for the fact that high quality defined-benefit pension plans are fast becoming extinct and that young people will either have no pension or a lower quality defined-contribution plan.

The Wealthy Barber says to save 10% of your income in addition to your retirement savings and your workplace pension plan.  So now we’re at about 20% of your gross income.  The idea is that if you save that much throughout your working life (25-30 years) then you will be in a very strong financial situation and will be able to have a comfortable working life and retirement.

It goes without saying though that the more money you save up front, the sooner you’ll achieve financial freedom.  For example, Derek Foster comes to mind.  He is the author of Stop Working, Here’s How You Can!  In case you’re unfamiliar with him, he has the distinction of being Canada’s “youngest retiree” who retired at the age of 34 after a decade in the workforce.  His approach involved a frugal lifestyle and saving as much as 70% of his income.

I must admit that I tend to lean more towards Forster”s approach.  While I’m not as extreme a saver as he was, my approach to saving for retirement has always been to save the maximum amount possible early on in life so your money can get the maximum benefit from compounding.

My advice to people is to go big and scale down afterwards.  It’s a lot easier to contribute less to your savings because you have saved too much, than it is to be forced to save more down the road.  After all, I’ve never heard anyone say that they wished they hadn’t saved so much!  Usually it’s the other way around.

What do you guys think about these approaches?  Are you good with saving 15%-20% or are you on the accelerated plan with Foster?

Photo Credit: Photo by Stuart Miles/FreeDigitalPhotos.net

Retirement Income

By: GenXinvestor

I recently read a post at My Own Advisor that got me thinking more about my retirement income streams.  While I’m still at least 20 years away from retirement, it’s important that I have some kind of plan to get there.

Time and again, I’ve seen family members and co-workers who weren’t prepared for retirement suffer some kind of financial hardship or not live a comfortable retirement because they failed to plan for it.  I don’t want to end up in that kind of a situation so I’m looking for ways that I can diversify my retirement income.

I want diversified retirement income streams so that I’m not relying on any 1 source for my retirement income.  I intend to have 5 sources of retirement income.

Canada Pension Plan

Despite all the concern about whether or not young people will have CPP when they retire, I believe that we will.  I’m not so sure about Old Age Security (OAS), but I’m not relying on it anyways.  CPP contributions have been increasing each year in anticipation of the strain on the plan when all of the baby boomers are retired and collecting it.  The plan is in reasonably good shape so I’m confident that it will form 1 of my retirement income streams.

How will I know how much money I’ll get?  Every July I call CPP and have them send me a Statement of Contributions.  It has all kinds of useful information, but most importantly for planning purposes, it tells me what my future payout will be at ages 60, 65 and 70 based on my contributions into the plan to date.  This is what I use to determine how much CPP I’ll get in retirement.

Company Defined Contribution Pension Plan 

I participate in a company sponsored defined contribution pension plan.  Every pay, a percentage of my pay goes into the plan.  The money is invested in a target date fund and some index funds.  One of the major weaknesses of DC pension plans is the lack of choice among funds.  That said, I’m confident that by investing the money in low-cost target date and index funds I’ll be able to grow the pension into a dependable income stream.

Registered Retirement Savings Plan (RRSP)

For most Canadians, an RRSP is a cornerstone of their retirement income plan.  Every year I try to max out my RRSP contributions so that I get the maximum tax refund from the government.  My RRSP is currently valued at over $110,000 so I expect it will be a major source of my retirement income.

Tax-Free Savings Account (TFSA)

As I’ve stated elsewhere, the TFSA can be a powerful saving and investment vehicle for growing your wealth.  I plan to max out my TFSA each year so that it can be a source of retirement income for me.  My plan is to basically buy and hold a collection of Canadian dividend paying stocks.  The great thing about the TFSA is that when I eventually start to withdraw some of the money in retirement it will be completely tax free.  In fact, a really great retirement strategy is to use the money from this account to offset some of the taxes that I’ll have to pay from the income that I’ll receive from CPP, my work pension and my RRSP.

Dividends

I also plan to use dividends as part of my retirement income.  I make regular investments into my Dividend Reinvestment Plan (DRIP) accounts to purchase shares in Canadian dividend-paying companies and will continue to do so.  I don’t ever plan on selling them, just live off of the tax-efficient income that they generate.

This is my plan to create diversified income streams for retirement.  Do you have a plan for your retirement income?