If you’re 55 or older, you’re probably looking forward to retirement.
After working 30 years, you certainly deserve a break. And traditionally, retiring in your mid-50s was a reasonable goal. All it took was a company pension, CPP, and a bit of savings to get you to your golden years in good shape.
Unfortunately, that’s not as true these days. In recent years, the average retirement age has been on the rise. That’s partially because of people living longer, but also because of financial factors, such as the decline of defined benefit (DB) pension plans. Since the 1990s, the percentage of Canadians in the private sector covered by DB plans has been on the decline. And the trend doesn’t seem to be slowing down.
In this environment, you really need your ducks in a row before you can retire. If you don’t, you could get in trouble. With that in mind, here are three signs that you aren’t ready to retire yet.
You don’t have $756,000 saved
According to a CIBC poll, Canadians think they need $756,000 saved for retirement. That’s a useful yardstick to determine whether you’re ready to retire or not. It’s based on an informal poll of Canadians, so take it with a grain of salt. But polls of professional money managers have yielded similar figures.
Of course, the amount you’ll actually need varies with age. If you’re older, the amount may be less, as you have fewer years left and less future inflation to contend with. If you’re younger, it may be higher, because you have more years left to go, and more future inflation to combat. Either way, you’ll need several hundred thousand dollars if you want to retire comfortably.
You do have savings but you aren’t investing the money
If you have a truly massive amount of savings, you could probably get by with letting it sit in a savings account. $5 million will probably cover you even if inflation dramatically exceeds expectations. If your savings are more on the margin — say, around $500,000 — you’ll likely need to invest it. If you have $30,000 in annual expenses, $500,000 will only cover you for 17 years. And that’s not accounting for expected inflation.
Hence the need to invest. If you invest your money in high-yield ETFs like the BMO Covered Call Utilities ETFÂ (TSX: ZWU), $500,000 might just be enough to retire on. ZWU is a high-dividend fund that, according to its sponsor, yields 7.89%. The fund has a fairly high fee, so let’s just say 7% to be conservative. At a 7% average yield, you’ll get $35,000 back in annual income on a $500,000 portfolio. That plus, say, $15,000 in combined CPP and OAS each year could easily be enough to retire on.
Of course, you shouldn’t put all of your retirement savings in a fund like ZWU. It gets its high yield partially by using complex yield-enhancement strategies that you might not be comfortable with. It may make sense as part of your portfolio, but it’s definitely not something to put all of your money in. However, it’s useful to illustrate just how much further your money can go if you invest it. Even with a modest 3% yield, you can make your $500,000 go much further than in a savings account.
You don’t have a DB pension plan
Last but not least, we have the tie-breaking factor: not having a DB pension plan.
A DB pension plan is a pension plan that pays you a set amount regardless of how they underlying assets perform. If you have one of these, you may be able to get away with not having the first two items on this list. That’s because these pensions are backed by large employers — typically government — with high ability to honour their commitments. If you get $60,000 a year out of a DB plan, you may not need $750,000 or a well-diversified investment portfolio after all. Otherwise, the first two points about savings and investments still apply.
