When it comes to retirement, the million-dollar mark has long been a nice, round number for many investors to latch onto. However, while $1 million can sound like a lot of money, if you start breaking it down, that nice, round number can dwindle really fast.
There are a number of things you need to consider when creating a retirement goal, and just saying, “I’d like to have $1 million by the time I retire” isn’t a realistic – or well-researched – goal to have in mind.
Some things you’ll need to consider are whether you’ll have children, if you will be paying for those children to get a university or college education, if you’re planning to buy a house, take a trip every so often, and how much you are likely to spend every year once you retire.
That’s when things get tricky, because, of course, that last number alone comes with its own strings. You have to consider inflation, your cost of living and expenses before you retire and how they will change after you retire.
The clearest answer for retirement savings is the question of when to start: the sooner, the better. If you’re a 25-year-old, then you have about 30 years to see your investments grow. That’s clearly a fair bit of time to work with. But if you’re around 40 and just starting now, you’re going to have to be a bit more aggressive in your investments if you hope to still retire by 65.
What you need to start looking at are retirement savings benchmarks based on all these factors, and there are a number of places to look for these online. However, a good rule of thumb is that by the time you’re 65 you should have about 10 times your salary saved if you want to meet the same lifestyle you’ve grown accustomed to.
Another rule of thumb relates to how much you want to take out of your retirement savings every year. For that, there is the 4% rule, which says you’ll want to withdraw only 4% of what you have every year for your savings to last for a longer period.
Many articles out there recommend that you come up with a goal that sets you up for 20 years – but what happens after 20 years? Don’t give yourself an expiration date, instead continuously reevaluate your investments so that you can continue to invest and take out the cash you need even during your retirement.
Let’s say you’re 30 years old right now and making $48,000 per year. This means that by the time you retire at 65, you may want to take out $48,000 that year. If that’s 4% of your total and you’re hoping to take out the same amount each year for the following 25 years, it means by the time you retire you would need a total of $1,200,000.
But if you’re not able to get there, use the 10 times rule, and aim for $480,000 with an aggressive option to reinvest funds during your retirement as well.
Whatever you choose, I would start with two things: opening a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). Both offer a way to save funds, but you can use the TFSA to plan for future payments, and the RRSP to plan for your retirement. That way you’re keeping your retirement funds completely safe, and working towards that goal you and your financial advisor have created together.
