Retirement is closer than you think – as long as you can work until age 65

I recently read a MoneySense article acknowledging you might not have to save as much as you think for retirement.

This article is encouraging if…

  1. You have no significant debt at the time of retirement.
  2. You intend to spend less in your retirement years than during your working years.
  3. You intend to work every year, in a decent paying job, for at least 40 years until age 65 to maximize government benefits.

The article cites this Statistics Canada table as its foundation, the average Canadian household spent just under $80,000 in 2013.

Assuming our Canada Pension Plan (CPP) and Old Age Security (OAS) will remain intact and kick in about $30,000 per year per couple, the article suggests a low-fee investment portfolio of $750,000 using the 4% withdrawal rule should do the trick for “enough” retirement income to cover what government benefits don’t. That $750k figure might be true, certainly very true for those lucky couples that have contributed to a workplace pension plan for decades.

However, let’s revisit the sizable $750,000 portfolio and the fact you’ll need to wait (read in work) until age 65 or even age 67 to take advantage of both CPP and OAS benefits respectively.

To save your $750,000 you’ll need to save at least $4,500 for about 40 years, earning at least 6% annualized on your investments while deferring taxes. If you haven’t been saving this much or earning that much or deferring taxes on this money then you’re behind.

From an age perspective, if you haven’t saved up at least $80,000 by age 40 then you’re really behind.  The math tells me you have 25 years left until age 65 so you almost need to double your savings rate to meet a $750,000 portfolio goal.

The lesson?

Save early, save often and keep rinsing and repeating those steps were never truer words spoken when it comes to investing.

The later you delay saving for retirement 1) the more you’ll need to save, 2) the less you’ll be able to spend, or 3) the longer you’ll be forced to work to retire comfortably.  Maybe all three will apply…even if you work until age 65.

Are you on track with your savings?

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $600,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

30 Responses to "Retirement is closer than you think – as long as you can work until age 65"

  1. A few bumps…

    “The article cites this Statistics Canada table as its foundation, the average Canadian household spent just under $80,000 in 2013.”

    Let’s not use “the average”, as it kind of skews things. Stats Can states the median 2013 household income as $84,000; at least 50% of Canadian households are not spending $80k a year (unless this is why household debt keeps ramping up to record levels…).

    Stats Can also shows the average 2011 household had a net income of ~$80,000, which means the average household is most likely spending ALL of its income (aka saving nothing). Stats also record current average national savings rate to be ~3.5% of net income, well below the needed $4,5000/yr.

    It’s also weird to use nominal values when discussing savings. Working for 40 years and saving at least $4,500 per year means your savings rate at age 25 might be 20% of income, 10% at 40, and 5% at age 60. As well, most of the growth in saved wealth comes at the tail end of a typical savings lifetime, thus it’s almost better to develop a habit of consistently saving 10% rather than aiming for $4,500 every year.

    Deferring taxes is also bad advice if you consider the income level of the median earner. RRSP contributions will not be of benefit and could very well be detrimental to, again, at least 50% of Canadian households.

    And what are the boundaries of “decent pay”? Remember, at least half of Canadian households earn less than $85,000 per year and individuals hover around the $35,000 mark.

    I guess the target audience the article is addressing is the top 25% of Canadian earners, those with money enough to worry about it enough to read MoneySense.

    Reply
    1. Average can certainly mean different things….I don’t like that term myself since it needs context and qualifiers…

      I would agree with you. A 25-year old saving $4,500 per year is not the same a 45 year-old. My article was some simple math to point out this is approximately, year-after-year, what you’d need to save to reach a certain portfolio value. It is not realistic to think 20-somethings can save that much. I couldn’t and didn’t and it took me until my 30s to finally ramp up my savings rate.

      I have no idea what “decent” pay is, but by definition, it’s an acceptable standard I would assume based on what your expenses are. Making $30,000 per year and only having $20,000 in expenses is decent pay to me.

      You make me smile with the target audience – most Canadians do not read MoneySense or care about personal finance 🙂 Agreed SST. Thanks for your comments.

      Reply
  2. Unfortunately as you say most Canadians don’t read MoneySense or care about personal finance which is why the big institutions can get away with gouging and employers are not pressured to do more with group RRSP or educate employees to act
    One flaw with this is I have rarely met any one , even men, who get the full CPP. It only takes some low earning , part time or self employed years and thats that. Most seem to be at $800 pm plus OAS.
    IHaving seen many seniors do “budgets” it has been possible to run a modest home , one car heat light power etc on $24k net .That doesn’t include trips, repairs. spoiling the grandkids. No CPP, EI, income tax splitting means you keep a lot more of what you have as income and no savings obviously

    Kathy Waite Regina, Saskatchewan Fee Only Planner

    Reply
    1. Good to hear from you Kathy.

      I don’t know anyone that gets full CPP.

      Between 18 and 65 (that’s 47 years) you need to not only contribute to CPP for close to 40 years (really 39) but you also need to contribute the Yearly Maximum Pensionable Earnings (YMPE). For most Canadians, that’s earning at least $55k per year and every year indexed to inflation. I don’t know of anyone who has maxed out YMPE for almost 4 decades straight.

      So, the punchline in my opinion, if you’re counting on the government to “save you” in retirement – good luck 🙂

      Reply
  3. Agree with all of the above, that’s why everyone should try to take advantage of the tfsa, regardless of how much you make or can save. The key is to save and increase what one saves as one earns more. Learn to invest in stocks, for income and drips. Then combine it with tfsa when your savings or drip grows. Then your future income from the tfsa will be tax free, meaning it will be worth at least 30% more, not having to pay taxes on the money.

    Reply
    1. No complaints from me Henry – everyone should love the TFSA and try their best to take full advantage of it while they can!

      “Learn to invest in stocks, for income and drips.” I do exactly that.

      Reply
  4. If one starts saving at age 25 and increases the savings, the following is a conservative estimate of the income they could generate by age 65:
    At 25 save $25 / mo
    At 30 save $50 / mo
    At 35 save $60 / mo
    At 40 save $100 / mo
    At 45 save $200 /mo
    At 50 save $300 /mo
    At 55 save $1,000 /mo
    Continue at $1,000 till age 65
    The above should accumulate approximately $280,000.00 and generate about $27,000 per year of income. I assumed one invested in dividend growth stocks and they averaged 5% per year Total Return.

    Reply
    1. Yes, over the lifetime of that investor, you could get some serious cash flow.

      Also, I’m not sure you could earn $27k from $280k portfolio but if you’re talking yield on cost I can somewhat see what you mean. I think Paul N. had the same question for you.

      I figure a $1M portfolio should yield easily $30k in passive income and there would be no need to touch the capital unless you wanted to – which is a good thing.

      Reply
  5. Haha! That’s funny… counting on government benefits for retirement! I just can’t help laughing. I doubt such pension plan will remain the same until I get there!

    Anyways, I don’t want to work that long. 😉

    Reply
  6. @ Henry – Could you explain how you get $27,000/ year with a $280,000 dividend portfolio? Assuming average dividend payout is just under 4% that’s around $11,200.00? Are you adding it to the CPP/OAS? As for that, OAS only kicks in at about 71 ? So your only getting if you are lucky $12K until then… I think that is a bit low to live on…

    Reply
  7. For those using the DG method of investing, they know that if a company increases their dividend, your yield on invested dollars goes up. Certainly each time you invest you may only get 3% or 4% initially. But as your dividend increases so does your yield on investment. Looking ahead 40 years, as I did with the example, it is very likely that that the yield will be at least 10% possibly much higher.

    Reply
  8. I’m leery giving general advice on line regarding the TFSA/RRSP do’s and don’ts. Every person has their personal situations and plans. I began investing in RRSPs at 19 (1979) even though I was employed by a company with a fully indexed DB pension plan. I did so so that I had options when it came to retiring early. TFSAs weren’t around back then but I would have used RRSPs anyways to shelter income in the higher tax bracket and take it as income in the lower tax bracket. People have to take into consideration the bigger picture when it comes to savings and investing IMO but starting early is good advice for darn near everyone.

    Reply
    1. Me too Lloyd and you’re right, every person is different and has different needs and goals…

      You were smart to invest in your RRSP even with a DB plan I think. Like you say, it brings you options and saving and investing early and often is usually a good recipe for financial freedom.

      Reply
  9. For those of you who invested in DG stocks in your tfsa, determine the yield when you bought each investment. Now calculate your current yield on the money you’ve invested. As tfsa has only been around since 2009 I would not expect a big difference, but you should notice the difference. Now think what the yield will or might be 35 years ahead.

    Reply
  10. Should have give an example: My wife bought National Bank in her tfsa: 2009, 2010 and 2011 with yields of 5.1%, 4.33% & 3.61%, for an average yield of 4.37%. But her current yield on investment is 6.77%. That’s a 54.9% increase on her average yield just in 4 1/2 yrs. Wonder what her yoc would be for NA if she continued to hold it for 35 years?

    Reply
  11. I gave the best example, as my wife is a better stock picker than me. I bought one of the major banks, investing 2009 thru 2013 in the tfsa and my average yield for the purchases was 4.19% and my current yoc is 5.53%, a 32.2% increase. Always listen to ones better half.

    Reply
  12. Hello: I want to create a withdrawal table very similar to the one in this article on the SeekingAlpha.com web site. Article: http://seekingalpha.com/article/3540166-retirement-strategy-a-journey-through-life-with-dividend-income-and-mortality-realities

    What I want to do is create a column for OAS and one for CPP to substitute the US authors column called Social Security. Can someone tell me what annual growth rates I can assume for OAS and CPP? (Meaning the average annual increase in the payments.) Thank you.

    Reply
    1. Hey Helen, my understanding is OAS benefits are indexed to CPI (Consumer Price Index). OAS benefit amounts are reviewed quarterly (in January, April, July and October) and revised as required to reflect increases in CPI by Statistics Canada.

      CPP is also indexed, but done once per year. CPP amounts are adjusted once a year in January based on CPI. The rate increase is the percentage change from one 12-month period to the previous 12-month period.
      http://www.servicecanada.gc.ca/eng/services/pensions/cpp/payments/cppcpi.shtml

      To keep things simple, I would use about 2% for CPI for any given year for both OAS and CPP.

      Hope that helps!

      Reply
  13. Thank you very much, Mark, and Henry. I like to be very conservative in my projections, so I’ll use 1.7% and see how my financial future looks to age 100. (My Dad is a reasonably healthy and very lucid 96.)

    Reply
  14. helen:
    I have a spreadsheet just for the RRIF and summary of my Investment Value (projected through to age 95) that looks like this:

    My RRIF (value at the End of each Year)
    RRIF Value
    Dividends
    Less RIFF Withdrawl
    Net My RRIF

    Wife RRIF
    RRIF Value
    Dividends
    Less RIFF Withdrawl
    Net Wife RRIF

    Sub Total RRIF’s
    Less To TFSA
    Total RRIF’s

    JOINT
    Joint Value
    Dividends
    RRIF to Joint
    Net Joint

    My TFSA
    Addition
    Yr End Value My TFSA
    Wife TFSA
    Addition
    Yr End Value Wife TFSA
    Total TFSA

    Total Stk Value

    My CPP\OAS
    Wife CPP|OAS
    RRIF From Cash
    Cash From Div
    Sub Total Cash
    Less Taxes
    Net Cash

    Reply
  15. Hi Henry: Thanks for sharing. I’ll print your list and use it to design my spreadsheet columns.

    Gosh, maybe Mark would consider providing a place on this web site for people to share downloadable model spreadsheet templates..

    Reply
    1. I hear you loud and clear Helen!

      I’m actually working on some spreadsheets for later this year. I want to have a retirement calculator one. Unfortunately my day job and some schooling takes priority – but I will work on it 🙂

      Reply
  16. Just some added comments. I only project for Div Growth, I don’t project any Capital appreciation. The rrif withdrawals projections are based on min withdrawals % (though the withdrawals are adjusted to actual amounts each year).

    Reply
  17. Henry: Good points. Thanks.
    Mark: There are so many (too many) retirement calculators. The challenge is to comb through them all and evaluate which ones are most useful, and then create a ref. list of the best ones. Maybe the readers can help.

    Reply

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