How much do you need to save to retire by age 60?
Can retirement occur at all despite not really saving for retirement until age 45?
Waiting to save for retirement certainly has risks.
Read on to learn more including how our latest case study shows you it’s possible to retire by age 60 despite starting a little later in the game.
Financial independence facts to remember
You may recall from previous case studies in this series, achieving financial independence (FI) in a short period of time is a simple concept but it’s not easy to achieve.
Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:
- For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
- You can realize financial independence by consuming less.
Here at Cashflows & Portfolios, we suggest you optimize both options above.
Check out how Michelle, a 20-something software engineer, plans to retire by age 40 including how much she’ll need to save to accomplish that goal.
This couple plans to retire by age 50 by using their appreciated home equity.
There are different roads to any retirement
Members of our site have already learned the powerful math behind early retirement: the more you save, the faster you’ll achieve your goal.
But life is not a straight-line. There are many different roads to retirement. Everyone has a unique path.
- What if you didn’t have a high-paying job coming out of college or university?
- What if you decided to have children and raise a family?
- What if you don’t have any workplace pension to rely on?
Depending on the path you took in life, including what decisions you made, your retirement planning could be vastly different than anyone else’s.
Modest savings can still add up
Not every person has a high savings rate. In fact, most don’t.
If you’re in your 40s or 50s, and you’re starting to think about retirement more, this post is for you!
We’re going to show you how Jacob and Marie, both age 45, who have 15 years left to save and invest for their desired retirement date of age 60 can still realize these dreams through a modest saving rate.
Let’s look at their case study.
How much do you need to save to retire at 60?
In our profile today, our couple is Jacob and Marie.
They are both aged 45 and live in a small town in Alberta. They have no children.
Unlike Will and Zoe with a young family, who live in a booming real estate market with a 7-figure house value to lean on for early retirement, Jacob and Marie have a modest home, with modest jobs. Their house price appreciation has not gone through the roof.
In fact, their house price hasn’t risen much at all, unlike many house prices that have soared in value across Canada. They also have no company pension plans to rely on for their retirement. So, if they are going to fund their retirement dreams they will need to do it pretty much on their own.
With some government benefits like Canada Pension Plan (CPP) and Old Age Security (OAS) to rely on we believe Jacob and Marie can retire at age 60.
Let’s find out how!
Learn where your money goes – the profile and cashflow
As new readers to Cashflows & Portfolios, Jacob and Marie know they need to nail down their cashflow needs and want to help them figure out their retirement goals.
We thank them for their readership that includes a FREE cashflow spreadsheet form with their subscription!
Here are the cash flow and investing assumptions for this couple:
- We know they want to retire at age 60, currently 45, but have few assets in the bank. That’s not great but read on why: up to now, they’ve focused on paying down their mortgage. That mortgage was a huge stressor for them given their modest income. But with no debt on the books, they can finally start plowing any money previously going into the mortgage into their investments for retirement in 15 years. Good plan!
- Marie has a decent job, making $60,000 per year. Jacob’s employment is more modest, he makes $40,000.
- From their profile, they have $0 contributions to date in their TFSAs and RRSPs but that will change with the mortgage now gone!
To help Jacob and Marie invest in some low-cost investment ideas for their TFSAs and RRSPs, we sent them these links:
- Our couple has a small cash fund for emergency funds but it doesn’t amount to much so it’s immaterial to their retirement income projections.
- We’ve assumed (as done in other recent case studies on our site) they will take their Canada Pension Plan (CPP) benefits at age 70 – the latest possible date to maximize government income benefits.
- They will take their Old Age Security (OAS) benefits at age 65. (It makes more sense to delay CPP over OAS.)
- As mentioned above, they own their home now free and clear. It is now worth $350,000 with no plans to move. We have house price appreciation and general inflation pegged at 2% increases year-over-year for the next 15 years.
- Their future investments (focused on equities) will return about 6.5% between now and age 65, and we’ve assumed some inflation-related wage increases as well at 2%.
- Thanks to some frugal habits now and then, their after-tax spending needs are about $55,000 per year. That means they can bank close to $30,000 per year into their investments.
- Again, they are going to need to save and invest wisely on their own since neither partner has any Group RRSP nor any workplace pension plan to look forward to. It’s all on them…
One of the biggest questions/challenges for Jacob and Marie is if they should take CPP at age 60 or 70 given they have a modest retirement income. We believe it’s best to take CPP at 70 and you’ll see why soon.
For further reading on when to take CPP, check out this other case study below:
Can they retire by age 60? What the math says…
Jacob and Marie are smart to make contributions to their RRSPs now that the mortgage is done, over their TFSAs (providing that RRSP tax refunds are reinvested). While we continue to believe the TFSA is a gift of an investment account for every adult Canadian to take advantage of, the math via our projections tells us that more money saved, and working sooner than later, will help this couple realize their desired retirement goals and more.
With the mortgage gone, our couple can invest about $30,000 per year inside their RRSPs vs. the current $12,000 per year in available TFSA contribution room per couple. Excluding any major lump sum investments to either account (we can run more scenarios showing TFSA vs. RRSP in the future), by taking advantage of unused RRSP contribution room in our scenario and contributing as much as possible to their RRSPs for the coming 15 years, this snowballing effect proves to be a winning formula once they hit age 60.
Without any pensions to rely on, thanks to these diligent RRSP contributions over the coming 15 years, Jacob and Marie will amass a combined RRSP portfolio value worth just over $700,000 despite being a zero now (age 45).
Again, we can’t emphasize enough that a high savings rate will do wonders for your portfolio whether you use the RRSP or TFSA!
You can read more in this dedicated post about the power of saving early and often where you can.
With their strategy by focusing on their RRSPs first, and making any contributions to their TFSAs with any money leftover in the coming years, we can see that Jacob and Marie are going to be more than fine in retirement even by starting their investing journey at age 45.
From their net worth calculation, while their real estate will make up the bulk of their assets as inflation increases the value of their home with time (at just 2%), we can see the RRSP assets are no slouch:
We’ve calculated the optimized drawdown for this couple will be their TFSA first, to minimize tax, then RRSP/RRIF assets.
Their maximum sustained spend is a healthy $59,000+ per year starting at age 60, in real dollars/today’s dollars (meaning they can actually spend more than they do today throughout retirement.)
And finally, you can see from that tax optimization we talked about above, they should withdraw first their minimal TFSA assets, then draw down the RRSP/RRIF assets, and by deferring CPP until the latest possible date (age 70), remaining RRIF assets can still be used well into their 90s.
I mean – look at the tax line in the chart below! That’s optimized!
Even then, not shown in this graphic below, they have that $350,000 home that has appreciated to a tax-exempt value of $870,000 by the time they are age 90 over a few decades. They could always sell that home then or anywhere along the way for any long-term care needs.
Final thoughts – how much to save to retire by 60
Saving early and often is sometimes just not an option. Even when it is, sometimes the mortgage debt takes priority.
Personal finance is sometimes much more than any math decision. How you feel about debt, how you want to manage debt can making paying off any mortgage sooner than later a priority. That’s not wrong, that’s just the personal in personal finance.
If that’s your decision, killing off debt before investing, this case study demonstrates that a modest retirement is still well within reach for many 40-somethings if they mind their cashflows and portfolios like this couple has done.
Couples considering paying off their mortgage before investing need to consider the opportunity costs of missing out on any stock market equity gains which may or may not materialize when they start saving for retirement. Paying down debt instead of investing is a tradeoff – something we’ll write more about on this site over time.
To help you plan for your retirement and help solve the retirement decumulation puzzle, let us know if there are any specific scenarios that you would like to see. As well, make sure you subscribe to our site so you never miss a post!
If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.
Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.
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