The Million-Dollar Myth
Posted by Gail | Filed under Retirement Planning
Why is it that every time people start talking about saving for retirement, the Magic Million shows up to the party? Is it any wonder people get turned off and shove their heads firmly into the sand? Let’s face it, saving a million dollars can be a daunting task. And who says you’re going to need a million dollars anyway?
Most experts now agree that you’ll likely need between 50% and 70% of your current income to meet your retirement expenses. So if you’re family is living comfortably on $65,000 right now, you’ll need the equivalent (in inflated dollars) of about $40,000 to avoid feeling the pinch later.
As with everything else in life, figuring out what retirement will look like and cost is a very personal thing. Rules of thumbs are fine, but they only go so far. To get a clear sense of how it’ll be for you, you have to be prepared …brace yourself… to do some math.
The first thing to look at is how much income you will have. When Drew O’Brien told me he has a pension plan at work, I suggested he get in touch with his plan administrator to find out how much he’ll be entitled to receive. Since his wife, Pat, would be dependent on that pension too, he also checked up on survivor benefits to avoid any surprises.
You can do the same when it comes to the Canada Pension Plan. This year’s maximum CPP payout is just over $800 a month. It’s may not seem like a lot of money, but it was enough to cover Dorothy Michael’s food and transportation. However much you receive, it’ll lower how much you have to come up with from savings.
Speaking of which, how much DO you have in savings? And how much are those savings going to grow before you have to start dipping into them? Lots of websites have calculators to help you predict the growth of your savings and how you can use them to create a retirement income. Just make sure you’re working on a Canadian site. (I’ll tell ya, I’m not overly fond of these calculators since they often over-state what you’ll need, which is why I wrote Never Too Late. But if you want to have an idea of how much your money will grow, they beat using a calculator.)
Jessica Jones was looking for ways to boost her savings so I suggested she use her RRSP tax refund to boost her next RRSP contribution. She made an RRSP contribution of $5,000 (paying taxes at a 35%) so she got back $1,750 in taxes. Jessica not only boosted her next RRSP contribution, she increased the amount of her next refund to $2,362 and kept growing her savings without pulling her proverbial belt any tighter.
When it comes to expenses, some, like medical, may go up a notch or two. Many others will go down or go away completely. Drew wouldn’t need a fancy work wardrobe anymore. Since Pat commuted for almost an hour each way to work, her transportation costs would drop. And since most retirees’ incomes are lower, taxes (yes, they’re an expense) will be lower too. With any luck, your children will be self-sufficient, so there’s another big cost gone.
Having looked at your current budget with an eye to what you think will go up or down, turn your sight to things you can eliminate completely: car and other types of loans, credit card balances and, ultimately, your mortgage. You objective should be to move into retirement with the lowest possible fixed costs and no debt.
Keep in mind that there may be things you can acquire while you’re still working to make retirement less expensive. Pat and Drew decided to modify their master bathroom so that they already had the features and fixtures they’d need later in place. Dorothy stocked up her “gift cupboard” over her last two years of working. Jessica made sure she’d replaced virtually all her appliances just before retirement.
It doesn’t matter if you’re two, five or fifteen years from retirement, if you make a plan and stick with it, you’ll be able to move into the newest stage of your life with confidence. Now that you know what to look for, quit procrastinating!
February 16, 2011 at 7:15 am
Regrettably, a million won’t even do it for my husband and me. With interest rates so low we are looking at closer to 2 million. However, having any amount will definitely make retirement more comfortable.
Recently, we’ve been reading about the downfall of excessive RRSP’s hurting retirees due to the tax implications of cashing them in. At what point do you quit investing in them. We have decided to make our first priority the TFSA and strategically use spousal RRSP’s to gain current tax relief and build my RRSP’s and leave his alone as they should top $1m at retirement.
My husband says it’s better for us to be balanced in our RRSP’s due to future tax implications, but I don’t really understand this. Can someone tell me why?
February 16, 2011 at 7:55 am
Natalie, I think he means that when you are both retired you will both be taxed at the lower rate so you should both have the same amount in your RRSP’s.
I could be totally wrong about that, I’m just taking my best guess.
Our lives are so hectic right now that we don’t have time to calculate for our retirement. We are paying off our mortgage as fast as we can and saving as much money as we can for later. Right now I’m just trying to get us life insurance, then maybe we’ll see about retirement.
February 16, 2011 at 7:56 am
I had a similar question. I am turning 30 this year and have approx $40K in RSSPs. I put around 5K a year into my RSSP but recently I was thinking of holding that back a bit and start loading up on my TFSA mutual fund at this which is virtually at a 0 balance.
Any thoughts?
PS. Love you Gail, you rock!
February 16, 2011 at 8:34 am
I’m 30.5 years old. I have a RRSP worth 32,000 and I have a defined contribution pension plan worth 41,000. I still have no idea how much I’ll need for retirement. I know I want to have a house that is paid for. I won’t always be contributing to RRSPs, eventually I’ll stop and contribute to a TFSA or something else.
I’d love to have a Million in the bank to retire off of, however I doubt I will. I still want a million net worth before I retire, but that will include the worth of any real estate we buy.
regards,
Jason
February 16, 2011 at 8:47 am
I have an rrsp, defined contribition pension plan and a small tfsa. Lately, I’ve been thinking that we both should try and max the tfsa, so we can live on the tfsa in the early years of retirement. I’m thinking that while living on that tax free money we would be able to withdraw rrsp money while in the lowest tax bracket and avoid paying high tax rates on it. Anyone else thinking about this?
February 16, 2011 at 8:49 am
Good Morning Everyone!
I Cannot Emphasize Enough Gail’s Valuable Point About ‘Resisting Entering Retirement With Any Form Of Debt’ As This Is Precisely What Both Of My Parents Have Failed To Accomplish…Believe Me When I Say: It’s Not A Financially-Pleasant Picture For Dad To Be Approaching 70 With Uncertainty Beyond Health Issues.
To Be Living On A Fixed Monthly Stipend Yet Having To Pay Down Any Debt Will Mean Less Pleasure & Enjoyment During Your Golden Years (Figuring You Do Not Work A Side Job) So Why Burdern Yourself Or Your Family With Such A Daunting Task? (Not Including Accrued Interest By That Point) Therefore, No Matter How Few And Far-Between Your Steps, I Positively Encourage Each & Every One Of Us To Work Towards The Almighty Goal Of Becoming Debt-Free Forever — TODAY!
February 16, 2011 at 8:51 am
I am lucky enough to have a very good defined benefit pension plan that will give me 70% of my best 5 years of salary, inflation-adjusted, assuming full service (which is a big assumption at my stage of career – I have no idea where I’ll be in 5 years, let along 30). I’m also saving a bit on top of that yearly in an RRSP. When I leave this job, I will need to think through carefully how much extra I need to save to ensure a comfortable retirement, but for now it’s all good!
February 16, 2011 at 8:56 am
The 2011 maximum pension is just over $900 ($960 actually), the average is just over $800.
http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml
Natalie, I think Amelia is right, your husband wants you to both have roughly equal sized RRSPs because then when you take money out you can take out the same amount and since the income is taxed based on who’s RRSP it comes out of as a household you can pay less income tax (because each individual will be in a lower tax bracket because they had to each take out less money). However, I think that in the last few years the pension income sharing rules have made this a bit of a moot point but only if you have converted your RRSP to a RRIF, which brings us to your other question.
You stop contributing to your RRSP when you no longer have an RRSP or when you no longer have earned income (i.e. you have retired), whichever comes first. You aren’t allowed to have an RRSP after the age of 71 (I think, I might be off by a year one way or the other). In the year you turn 71 you have to convert your RRSP into a RRIF (Registered Retirement Income Fund). Once you have a RRIF you are required to withdraw a defined percentage of the value of your RRIF every year. You can withdraw more but you can’t withdraw less. The percentage you must withdraw is based on your age. I think at age 71 the percentage is around 5% and by age 90 it goes up to somewhere around 20%. The dollar amount you must withdraw is a fairly simple calculation, it is the defined percentage times the value of the RRIF at the end of the previous year. So although that 20% when you are 90 seems high, there should be much less money left in your RRIF when you are 90 then there was when you were 71…
February 16, 2011 at 9:07 am
And I managed to mess up the CPP rates. The average disability benefit in 2011 is just over $800, the average retirement benefit is just over $500. The retirement benefit numbers all assume CPP is started at age 65. If you take it earlier you get less per month (but since you are taking it earlier you will get more months of payments) and if you take it later you will get more per month.
February 16, 2011 at 9:27 am
I followed Gail’s advice to check out the calculator…is says that I need 1.3 million to retire on 40,000 a year…at this rate I will be 1.2 million short. Once I start working again the numbers will change for the better, and I will put 12% of my pay into rrsp’s to get me through retirement.
February 16, 2011 at 10:16 am
My take on TFSA vs. RRSP
What I have heard – TFSA’s make more sense to contribute to if you have a lower income (taxed at low rate). They also make sense as medium term savings vehicles (think down payment on house, purchasing a car etc).
What I believe – anytime the government wants to give me some of my money back for saving I will take it. Even if my tax rate is low in the beginning, and low at the end when I am retiring and withdrawing money from my RSP, I will have the benefit of compounded interest in my favour, and the RSP doesn’t have to roll over until I am 71.
The only thing I would add is that if you are starting out fresh at an older age (50+) – I would double-check with someone more qualified to determine the exact set of circumstances that you are in, and what the best course of action would be.
February 16, 2011 at 10:28 am
I’ve always been concerned by the amount we’re supposed to have saved for retirement. I have a lot of retired relatives who are doing just fine, and none of them have millions in the bank.
It does get me worried though when I read about all the numbers I should have. I decided to spread my retirement income out into several different sources. I contribute to my RRSPs and TFSA, but no where near the amount other people in this group have mentioned.
Instead, I own two properties, both with 25 year mortgages, which I am overpaying, so I should own both fully by the time I am 45-ish. The problem is I use them to leverage more investing, so in 5 years, when both have some equity in them, I will refinance the mortgages to the full amounts again and then use the equity to by property number 3. I figure if I can have 4-5 properties, each one with 2 units, by the time I retire, even if they have outstanding mortgages, the rent will cover all of my costs and provide a steady income.
The third part of my plan is to have a couple of successful small businesses running for when I retire. The current plan has me quitting my full time job at 51 and going to work for myself. Those two companies should provide me with an additional income. I have no intention of quitting working ever. I’ve seen too many people retire then lose their minds with nothing to do (my FIL was married for 30 years, retired, then almost ended up divorced – he drove my MIL insane).
The fourth and final part is my kids. I have every intention of making sure that I am actively involved with their families, and my grand kids. Since I don’t plan on spending my golden years jet-setting around Europe (if I want to see half-naked old men on the beach, I’ll be able to use a mirror!), I will save a ton of money and alter my lifestyle to match.
The backup plan is to use one of my many hobbies: art, wood working, etc. to generate a small income in case everything goes down the pooper. I’m also not above working at Tim Horton’s or Walmart to make ends meet.
I hope I am being realistic and not delusional. But only time will tell!
February 16, 2011 at 10:29 am
I think, with our mortgage/life insurance/rrsp/tfsa/resp removed from our budget, we could live on 50% of our salary. So when do you stop saving?
February 16, 2011 at 10:33 am
I only began to save in a RRSP (savings account of all things!) last year, to help me to form the habit of saving for retirement. This year, I plan on tripling my contribution amount and have opened a mutual fund account so that the money may actually get some growth instead of just sitting stagnant.
Again this year will be more about forming the habit of saving, and increasing contributions. Next year will be about getting as close as I can to maxing out TFSAs and RRSP unused contribution room. I don’t know that we’ll need the Magic Million (or three), but I will aim to put as much away as I possibly can over the next decade or so.
February 16, 2011 at 10:46 am
What I mean above is at what age do you stop saving? I assume you don’t continue to contribute to RRSPS throughout your retirement. So when do we say, we have enough RRSPs lets just stop.
I wish I had a pension it would be a lot easier!
February 16, 2011 at 11:20 am
@Natalie — as others have mentioned a spousal RRSP is used to reduce the tax expense in retirement, the idea is that if you split the income equally between 2 people you will pay less tax than if the same amount is withdrawn for 1 person due to being in lower tax brackets.
However if you have a pension this may not be necessary as the government allows people to basically do the same thing for pension income.
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/menu-eng.html
@Jason — time is on your side — given the numbers you gave even if you were to stop contributing you would have $400K in 35 years (assuming a 5% real rate of return). If you can average $6K a year in contributions you will have close to $1M.
February 16, 2011 at 12:03 pm
If we were old enough to retire today (and had no mortgage, no child rearing costs, no work related costs, no savings costs) we could manage on about 50% of what we currently take home.
Having said that, hubby has a defined benefits pension that is indexed, and I have a defined benefits pension (that is not indexed). The projection of what these will pay us at 60 yrs old equals exactly 50% of what we currently make (all taxes accounted for). For us, 60 yrs old is only 15 years away – it’s starting to get easier to “project” what our real costs might be.
Aside from our pensions and what the government would provide for us (CPP and OAS), we are contributing to RRSPs and TFSAs because, while we will probably manage our day-to-day expenses on our work and government pensions, we’ll need extra money for the extras that make retirement life fun and enjoyable and stressfree.
How much will we need to cover the “extras”? Not sure, that’s what I’m in the process of trying to figure out – but my gut tells me we should have a minimum of $300,000 set aside. Will we have that, based on our current savings rate? Probably not – but who knows – 15 years left to save, and possibly another 5-10 years before we need to dip in means there are plenty of years left for the magic of compounding to grow our savings.
February 16, 2011 at 12:11 pm
Quick point on Jessica Jones. She could have done an RRSP gross-up and put in an extra $2692. Doing it her way she gets back $1750 that will have to wait another whole year to generate a refund.
The gross-up on $5k at 35% is $2692. If she borrowed the $2692 at the end of February from an RRSP loan her total RRSP contributions would have generated a return of… $2692. Perfectly paying back the loan with very little interest, and getting the money in earlier.
(Math: 5000 / (1 – 0.35) = $7692 – 5000 = $2692. Sub in your own amount and tax rate.)
February 16, 2011 at 12:18 pm
I find looking at rrsp calculators very overwhelming. Even though I’m 26 with ~$33000 in an RRSP, it tells me I need to be contributing about $7000 a year! As a current grad student, that’s just not feasible. How much I can contribute depends greatly on what scholarships/funding I receive each year.
This year, I was able to contribute $4000, but I split it with $2000 into my RRSP and $2000 into a TFSA. I know some logic dictates that I shouldn’t be contributing to a RRSP since I don’t pay any taxes (about 80% of my income is scholarships which are not taxable). However, I like the RRSP since it feels more untouchable versus a TFSA.
I imagine when I start working full time I’ll be able to up my contributions a lot, but it does seem scary to need to find $7000 each year when I don’t know what my future expenses and salary will be.
February 16, 2011 at 12:19 pm
The advantage of a spousal rsp is that in protects you case the relationship goes bad. The contributing spouse has a limited amount to time to try to make a claim on the money if a split occurs. Even though income splitting is allowed, this can be a better protection for some.
If someone is done paying the mortgage, expenses decrease (but you need to keep that maintenance account going, pay taxes, utilities…). If someone is renting, expenses do not decrease. How will you spend all that free time? If you have hobbies to which you will devote more time, expenses will likely increase so try to make an income from that. Medical bills usually increase, especially if you lost your employer-paid benefits (dental + medications + treatments). Wait until you research the cost of living in a retirement home! Be VERY nice to your children…
What goes down for sure? Payments towards your retirement (10-25% of gross).
If 1 million give ~ $40000/yr of pre-tax income (leave the bulk of the capital untouched), I will need the million of today’s money!
RSP vs TFSA:
In the low income bracket, TFSA will be better and more flexible (money put in and taken out).
Reminder: once you begin to get your RSP $ out, you can put the unused portion into your TFSA for it to grow tax-free during your retirement years. The yearly contributions are allowed.
RSP contributions are in pre-tax dollars (frees up money now) whereas TFSA are post-tax dollars. We do not know what the tax system and brackets will be when we retirement (we can guess).
TFSA is ALWAYS great for EF, house fund (downpayment, maintenance), car expenses (downpayment, maintenance), trip of a lifetime. It can be great for retirement, but don’t take that $ out too early.
February 16, 2011 at 2:27 pm
@akajb
Although you may like the untouchableness of an RSP, you are leaving alot of money on the table, that could be in your pocket. In a few years time you will be taxed at a higher rate… so that $2000.00 RSP room, which accumulates each year… might mean a big difference depending upon what your tax bracket will end up being.
February 16, 2011 at 2:30 pm
@akajb: good for you for managing to put money away in your RRSP while you are a grad student! If you DO continue to put funds into the RRSP, you should look at NOT deducting the contribution on the current year’s tax return. Many people don’t realize this, but you can choose to wait to make that deduction.
In your case, presumably you’ll be in a higher income tax bracket in a few years which will be the best time to make the deduction.
Otherwise, you may very well end up paying MORE tax in the end for this RRSP: As you will need to pay tax when you withdrawal the funds in retirement. Quite possibly your tax rate in retirement will be higher (or at least the same), as it is now.
February 16, 2011 at 2:31 pm
@ Kat: looks like we had the same thought here!!
February 16, 2011 at 4:37 pm
Speaking of retirement and bathrooms (I know this is weird), but if you want to retire in the home you’re living in and expect a bathroom renovation I have one very large cost-savings tip which I recommended to my parents as a design professional. At the walls near the toilet and the tub, under the waterproof cement board, (have your contractor) put a layer of plywood underneath. Why? If you ever need to add barrier-free (accessible) grab-bars later in life, you have extra support and can fasten them where you need it, rather than where the studs are. You won’t necessarily need to add them right away, but if you need to, down the line, you don’t have to rip up your tiling job to do it. Unless you want to.
February 16, 2011 at 5:30 pm
Heads up for all. Run, do not walk to the bookstore and buy Gails’ book “Never Too Late”. I received it for my birthday and read it cover to cover (nice picture by the way Gail!). Then, I asked my DH to read it as well. He finished it the day before our financial adviser was arriving here for our annual meeting. He even took notes!
Wish we had had this book years ago. I don’t care if you are 20 – it has excellent advice about retirement and you can be ahead of the game if you start to plan now.
Our adviser states we will be fine. I, however, want to get my ducks in a row i.e. full TFSA’s so will work a while longer.
Now, I know you are going to say that you are trying to pay off debt, raise kids, and have a life in general – but, we all know that $1.00 turns into $10.00 which turns into $100.00 over a long period of time.
It’s never easy. Found out today that we will have approx. $1,600.00 in car repairs for our two cars. Sure am glad I have an emergency fund!
February 16, 2011 at 6:41 pm
Great post today Gail.
ThiNg, I’d love to pick your brain and discuss your plan in more detail. Interesting….
MisFitz -thanks for the tip
February 16, 2011 at 6:58 pm
There’s an interesting book called “The Number” which is all about figuring out how much you need to retire on. Lee Eisenburg (the author) has a quick rule of thumb – comfortable, comfortable+, Kind of rich, rich guide, where comfortable is $50,000-$100,000 per year, which I think is on the high end of comfortable.
But his basic quide is 4% of invested assets plus annual value of home equity (value of home/year to live after retirement) plus inheritance plus gov’t and pension benefits = how much you can safely spend each year. But, he points out that if you don’t factor in what it is you actually want to do with your life in retirement, imagine how you want to live and what that will cost you, then you’ll just be spending money, not living. He gives far more detail, of course.
February 16, 2011 at 7:50 pm
Thanks for all the answers to my question. I learned a lot today.
February 16, 2011 at 8:26 pm
I just retired at the end of January. I was worried last year as to what I would be able to live on and having read all the articles last year in Money Sense, I now feel a lot better.
I have a defined pension plan which is indexed. I have applied for early CPP and I have a severance gratuity of $39,000. which was put into RSPs (mutual funds – 50% and 50% – equity/bonds). I also have another $25,000. in RSPs to add to my gratuity. I have a TFSA and this is the one thing which I would have wished for when I was younger. What a way to invest in your future – NO Taxes on earned profit!! In my opinion, I’d forgo the RSPs totally (and my accountant says so too)!!
According to Money Sense, you will live quite nicely on 70% of your salary when receiving a pension. If you have an exhorbitant lifestyle, then 70% won’t be enough. If you have no mortgage, no credit card debt, no loans, and if you live simply, you can survive on 50% of your earned income. I find this a little unreal – how would you have a life in retirement?
One problem which I have forseen is that I will lose some of my OAS inevitably when taking out RSPs in future. RETHINK RSPs!! Fill your TFSA first every year and then, fill your RSP. I want to take out as much RSP money as I can without having a lot more tax to pay ASAP. Everything will go into the same investment – a Life Plus package from my insurance company. One problem for me is that when my husband dies (he is considerably older), those RSPs will cause my sons to pay more money for this inheritance after I die. RSPs can’t be given to children without a financial consequence. That is why I need to get those RSPs converted to TFSAs quickly. Think ahead!!
Now, I have had two retirement evaluations from my insurance company – there is a specialist who will meet with you for free and who will tell you how much you need in retirement. I can’t tell you what I learned. I thought it was all crap. It was scary too.
If you think that you need 2 million in retirement, is this including your pension, CPP, and OAS?
I added my pension, and my CPP and multiplied this yearly net income times 20 years in retirement and I had $1.2 million. When you add RSPs and TFSAs it will be substantially more. I’ve not included any OAS and according to Money Sense, many people don’t need their RSPs in retirement (but have to withdraw them at the rates required). This is extra income and it comes at a price tax wise. Rethink RSPs!!! I had to take my gratuity in RSPs so I have to deal with it.
With a mortgage yet to clear, I have less to spend right now, but when it is paid off, I will have more money than I will know what to do with monthly. I mean it. I have a pension paying me more than 71% of my prior salary. My CPP is early with a 20% deduction but it is huge! I will clear more than I made in January!!!
Do your research for retirement. Get your mortgage paid off, have no credit card debt and make sure you don’t have a car loan or a line of credit. You will probably live more comfortably than you think right now. It all depends on your life style.
I heard once that you should buy a new car with cash and live on half of your salary for a year before you retire. Sounds good to me.
Gemini
February 16, 2011 at 8:41 pm
[...] This post was mentioned on Twitter by Jaclyn Bartlett, beanie1972 and Dee Lees, Gail Vaz-Oxlade. Gail Vaz-Oxlade said: The Million Dollar Myth : http://gailvazoxlade.com/blog/archives/2576 [...]
February 16, 2011 at 9:46 pm
[...] are and what kind of spender you are. What are your financial goals (buying a house, etc.)? And how much do you really need, when you are able to start socking money away for [...]
February 16, 2011 at 10:05 pm
@Kat and @Jen
I’m not sure if it’s being deducted each year. I do know that I’m contributing no where near my limit for the year, and my limit seems to keep increasing. But thanks for the heads up, I’ll look into it.
My parents still help me file my taxes each year. I know having all the tax credit saved will be good for when I finally have a “real” income, but I also don’t mind the idea of letting my parents use them since they have helped me out a lot over the years… I really should look into how all this works in more detail soon. Maybe this coming week, as I’m heading down to my parents and taking all my tax stuff with me.
February 17, 2011 at 2:24 pm
@Melanie
I am more than willing to go over the details of the “plan” LOL. The more eyes I have on it, the better it will become.
Fire away with your quesitions! Or just follow the link to my website and send me an email!
February 17, 2011 at 2:25 pm
Oh and I should add that the plan is based on the advice of a friend. He’s 28 years old and worth 5-6 million. All self made (although his dad did help him at the beginning).
February 17, 2011 at 3:01 pm
I agree there is no standard magic number. It’s like everything else we should be doing, figure out a monthly budget that will work when you are retired. If you do things right that budget should not include a mortgage payment (it will be gone), and transportation and personal clothing should be less than you are paying now. It will still include the basics like groceries, insurance, car costs etc. You also probably won’t need to continue making those RSP and Savings contributions.
I’ve found that because of my projected pension plan and my plan to retire sans debts (I’m living with a mortgage only now), the amount I need over the years I estimate I’ll need it is much less than $1MM.
It also depends on your lifestyle. We live simply but comfortably. We don’t indulge in fancy cars and designer clothes and I don’t have a speck of granite anywhere in my house. We want to be able to live in a downsized condo and take 2 vacations a year.
February 17, 2011 at 3:47 pm
Gail:
Does the amount in the EF change when entering retirement? Do you assume that the money WILL come in? Which personal factors in terms of type of income should be considered uncertain as income (eg. tenant pays rent…)
Just curious.
February 18, 2011 at 9:16 am
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February 18, 2011 at 10:15 am
@Marie
In my personal situation, I think my EF will end up staying about the same when I retire. Because there is a good chance that I will still have outstanding mortgages, I know I need to have enough to cover those costs should something go bad. Plus, you’re going to want a little buffer anyways because tenants can be unreliable for paying rent on time.
The last thing you would want, and I think this applies the same right now, is to be so tight that one missed rent cheque causes a mortgage payment to bounce.
I’ve always purchased houses which were well with in my price range, and with a signifigant down payment so that the mortgage payments were manageable. Then I also overpay the mortgage (even if only be a couple of hundred dollars) so if push came to shove, I would lower my payment to mininmum required, and use the EF to cover me as long as I could.
February 18, 2011 at 11:21 am
Great post, but I’m surprised that neither the post itself, nor any of the comments, mentioned inflation.
Inflation is an ENORMOUS factor in determining how much you need in order to retire.
Sure, a 65-year old couple retiring today doesn’t need anywhere near $1 million.
But a 25-year old couple will.
Think about it. If inflation averages 2.5%, then in 40 years, $1 million will “only” be worth $370,000 in today’s dollars. At a 4% safe-withdrawal rate, that nest egg will generate $14,800/year in income. CPP and OAS (assuming you’re eligible for the maximum) will add another $16,000, but that’s still only $31,000/year for a single person.
And remember – that’s WITH $1 million. If you aim lower, you’ll get lower.
February 22, 2011 at 9:52 am
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January 17, 2012 at 5:35 pm
Natalie – Re: concerns of having too much in RRSP’s is that if you have a large amount of money e.g $200,000+ in them at the time you turn 71 when you have converted them into RIF’s, you must withdrawal the minimum from them which could potentially create OAS clawbacks. The answer to this is that in years prior to age 71 in years ideally when you are in a lower tax bracket, that you pull out larger amounts of money from your RRSP (where it may also be taxed at the lower tax rate) in order to minimize this risk. Also, after death, large amounts left in your RRIF are going to be highly taxed leaving substantially less for your beneficiary. This is what I understand from various sources on the subject.
May 12, 2012 at 7:14 am
reader with something unique to read, it…
is something that the everyday person can relate to as they are reading it. but, that isn’t all you have to do! in fact, you need to have at very least a basic understanding of your local language before your blog…