Canadians Expect to Need $1.7 MILLION to Retire – That’s a Problem!

According to a new BMO study and related articles on this subject we read, Canadians polled now expect to need $1.7 million to retire.

Is that right?

Does that even make sense?

We believe that’s a problem for a few reasons. Read on.

How much do you need to retire? 

Answer: “it depends”.

Yes, those are the facts.

A key part of any retirement planning usually comes back to the question: How much do I need to save to retire?

Well, we’re here to tell you that $1.7 million saved up for retirement, while interesting, may or may not be what you need at all.

What you may need in retirement varies by individual, by couple; it can largely depend on your income today and desired income needs going forward and it can also depend on many things outside of your direct control like taxation, inflation, and sadly, your time of death.

Herein lies problem #1 we have with such catchy titles – they are interesting but not relevant.

Knowing how much you may need to save, based on how old you are, could be a great first step in the retirement planning puzzle but like most things in life, planning only gets you so far. We’ll come back to that point in a bit.

How much should you consider having to retire?

Answer: “it depends”.

Let’s look at some common back-of-the-napkin retirement planning rules of thumb (and why they are flawed).

Live off 70-80% of your pre-retirement income

Some retirement experts recommend strategies such as saving 10 times your pre-retirement salary and/or living off 70-80% of your pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $70,000-$80,000 per year to have a comfortable lifestyle after leaving the full-time workforce.

The problem with this rule of thumb is it does not account for government benefits, part-time work, or your desired lifestyle. It’s another blanket statement. Not helpful.

Use the 4% rule

Other retirement experts including some self-proclaimed experts in the Financial Independence, Retire Early (FIRE) community have fallen in love with the 4% rule for an early retirement plan. It’s a decent rule of thumb but again, flawed for today’s times.

That rule implies, based on only U.S. historical research at least, that one could determine your retirement income needs by dividing your desired annual retirement income by 4%.

Using a desired $80,000 in annual retirement income, as an example, implies you would need a retirement nest egg of about $2 million ($80,000 / 0.04).

While also lacking to account for government benefits, part-time work, or your desired lifestyle, there are other flaws with this rule that early retirees should ignore in particular!

We won’t repeat that content, you can check out those details here:

Why the 4% Rule Doesn’t Work for Early Retirement (FIRE)

We believe a far better approach to any retirement drawdown design is using variable (percentage) withdrawals. This method uses a variable (and an increasing) percentage (hence the name) to determine withdrawals from a portfolio during retirement.

Again, the 4% rule is interesting but this “rule” may be totally irrelevant to you.

Use retirement savings by age

The big money manager Fidelity in the U.S. published content years ago that is still used today.

Fidelity devised a savings age-based model to help assure you’re at least in the ballpark to have enough money for retirement.

Put another way:

Beyond the previous challenges highlighted above, this age-based guideline is rather linear (literally) meaning it assumes full-time work would need to end in your late-60s.

How much money does the “average” Canadian have saved?

Statistics Canada tracks asset and debt levels held by Canadian households.

Note that this is the household family average, which includes single-person households.

Source: Statistics Canada

Notes:

1. Private Pension Assets exclude public plans administered or sponsored by governments: Old Age Security (OAS) including the Guaranteed Income Supplement (GIS) and the Spouse’s Allowance (SPA), as well as the Canada/Quebec Pension Plans (C/QPP).
2. Financial Assets include bank accounts, investments, etc. That also means government retirement plans such as the Canada Pension Plan (CPP) are still out of scope!
3. You can play with the filters in the link above – this is just one example/data extract.

Interesting, right??

The takeaway for you is that most Canadians, let alone couples, who think they need $1.7 million ready for retirement in invested assets will never have it saved up – not by a long shot.

Do some Canadians need $1.7 million to retire?

Answer: Yes!

And we have yet to do a case study on that very specific enough number, until today.

Before we reveal the assumptions and our findings, back to the BMO study.

Accordingly the press release above, we found the following of interest:

• “BMO’s Retirement Study found that 74 percent of Canadians are concerned about how current economic conditions, most notably inflation and rising prices, will affect their financial situation, and 59 percent believe this will affect their confidence in meeting their retirement goals.”

Rightly so.

Inflation can be a wealth-killer but there are ways to invest for higher inflation that My Own Advisor wrote about some time ago.

• We read about the “golden age” to retire is somewhere between “the ages of 60 and 69, with an average age of 62.” We’ll use age 62 for our case study below.
• We found it very interesting that “one-fifth (20 percent) of Canadians are contributing to their RRSPs to achieve financial independence as early as possible and 15 percent are saving towards an unexpected early retirement. If they could retire early, one-in-five (21 percent) Canadians would like to retire in their 50s.”

While the article goes on to state the merits of financial advisors as “powerful resources” we think our unbiased content and services as a paid-for-service support team here are pretty darn good too.

Besides, in our low-cost process and services, which ignores any money management, you provide all the inputs and assumptions for us to work with – so we go well beyond alleviating “some of the financial pressures” that many Canadians face. We also share what our DIY investor community thinks about to support your decision-making. We’ll link to our low-cost support model for you to check out below too which includes massive discounts that some returning clients are getting already this year!

So…do some Canadians need $1.7 million to retire?

Yup.

But we anticipate not very many at all…based on what you desire to spend, how long you might live, and a host of other factors that will be very personal. Again, spending is personal.

According to some data we looked at:

• The average Canadian household was spending about $67,000 in 2020. So, for the sake of this post, adjusted for inflation, let’s say that’s $72,000 per year now. Mind you, that’s household spending, on average which may not be specific to retirees since childcare expenses and saving for retirement should be done by retirement.
• The amount of personal savings required to retire in Canada is challenging to estimate because it relies on several variables, again, preferred lifestyle but also varied sources of income (i.e., government pension, investments, workplace pension, etc.). We’ve read a few sources that indicate the average household spending for some Canadian retirees might be around $40,000 per year – but that seems a bit low to us. Average monthly household expenditures for those 65 and older — including rent, groceries, and healthcare — stand at around $4,345 in the U.S., according to the latest government data. Adjusted back to Canada, let’s put that number at about $6,000 CDN per month.
• In 2020, David Aston from The Toronto Star writes “If you’re looking for a middle-of-the-road benchmark, consider that an average Canadian senior’s spending — including income tax — is about $43,000 a year for singles and $65,000 a year for couples. That’s my estimate based on Statistics Canada Survey of Household Spending data that I’ve adjusted in several respects.”

This makes some ranges for retirement household spending somewhere between $40,000 per year on the lower end of “average” and closer to $72,000 per year per household on the higher end of “average”.

Again, these are just some examples of what your spending might be in this “average” range. This sum (and your spending needs) can differ significantly from others based on your personal situation.

Nevertheless, leveraging the following assumptions, we were curious if Canadians need to be worried about having $1.7 million to retire with.

Many should not.

Here are our assumptions:

• Desired retirement age, for a couple = 62 each.
• Desired household spend for a couple = $6,000 per month, after-tax.
• We will include max OAS (Old Age Security) income for each, age 65 for both.
• We will include 75% of max CPP (Canada Pension Plan) income for each, starting at a traditional age 65.
• We will include 3% inflation over the coming decades.
• We assume our fictional couple lives in Alberta.
• We will assume our couple is debt-free, they own their home in Calgary worth $500k, with no outstanding lines of credit.
• Our couple has no workplace pension plan(s) whatsoever to rely on. It’s all on them – the entire $1.7 fictional million dollar portfolio they believe they need to start retirement with.
• We’ll also assume based on the BMO article/study they have always invested very well and wisely, inside their RRSPs exclusively, such that as a couple they have most of this $1.7 million saved between them. We will assume they have $1.5 million saved up in their RRSPs. We will assume the rest is $200,000 saved up in some cash within a TFSA invested in laddered GICs to shield themselves from stock market safety.
• The rate of return on their RRSPs pre-retirement was about 7% but we’ll roll that back to 5.5% in a 90/10 mix of stocks and bonds for the coming decades.
• Any income in excess of the desired spending is deposited into their TFSAs.
• The rate of return on their $200k in cash/GICs is just 4% now and going forward.
• They figure they might die-broke with their spending to age 95, with real estate as their final asset for the kids.

The results – do you need $1.7 million to retire?

If you are an average spending Canadian, then you absolutely do not need $1.7M to retire.  That is unless you want to leave behind a large final estate.

Using the assumptions above, spending $6k/month after-tax (increasing with inflation annually) starting at age 62 results in a final estate value of $3.5M.

Take a look at their assets/net worth throughout retirement:

But what if the couple wants to spend more?  What’s the most that they can spend based on the assumptions above?

The answer?  Up to $90k/year after tax and increasing with inflation annually!

Canadians expect to need $1.7 million to retire – that’s a problem summary

The amount you need to save depends on a variety of factors such as:

• The age you want to retire at
• The kind of lifestyle you want
• Your household status (married/partner or single or other)
• Whether you’ll continue working (or not) during some or any retirement years
• Whether you’ll have to pay down a mortgage or other debt (or not)
• How inflation might impact your portfolio
• How taxation will impact your portfolio
• Your rates or return during retirement
• When you might pass
• And more and more and more….

Many financial planners say you’ll need around 70-80% of your pre-retirement income as an estimate. Other planners might suggest starting with the 4% rule. Still, others might suggest some savings targets while working to assure you have a chance to meet your retirement income needs.

All of this, while interesting, may not be relevant to you whatsoever.

Knowing how much you may need to save, based on how old you are, could be a great first step in the retirement planning puzzle but like most things in life, planning only gets you so far.

This means you’ll need to consider the process of planning and re-planning as a major key to your retirement income puzzle. Retirement planning, therefore, happens long before retirement and long after you start retirement to ensure your plan is on-course or can be adjusted back to course. We’ve seen tons of evidence this process of re-planning works and works very well.

Our problem with such catchy titles and information is they are not usually relevant to you when you dive deeper – personal finance and investing are and will always be personal.

For today’s post, that means you probably don’t need a $1.7 million dollar portfolio in your early 60s to enjoy a very comfortable retirement. Then again, maybe based on your spending needs, you do 🙂

More reading and case studies:

Can you retire using just your RRSP? It is possible!

Could you retire if the Global Financial Crisis happened, again?

Curious about investing in the TFSA or RRSP? Well, consider the TFSA first at any income level. Read on why when the TFSA wins over the RRSP for investing. 

Need some support? We’re here to help!

Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with. If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!

If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.

Thanks for your ongoing readership and for sharing this site with others. We feel our site and services are totally unique in Canada and we appreciate all the feedback!

Again, keep all the comments and questions, coming! 🙂

Mark and Joe.

Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only. Any reproduction of any site content is strictly prohibited without consent and authorization. 

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