Do you want to retire at age 65?
In the past, that was a realistic goal, but today, with inflation eating away at Canadians’ purchasing power, many find it out of reach.
The problem is not that Canadians’ incomes aren’t keeping up with inflation: real wage growth from 2022 to 2024 was actually 3.4%. The problem is that Canadians’ real wage growth isn’t as high as it was in the past. So, Canadians today need to work longer than the Canadians of Yesterday did.
So, if you want to retire at age 65, it helps to plan your retirement in advance. With that in mind, here’s how much a 40-year-old Canadian needs to retire at 65.
Source: Getty Images
About $193,331
To retire at age 65, a Canadian today needs about $193,331, assuming that they won’t save any of their money in the future. That assumption might seem unrealistic, and it is: the problem is that factoring in 25 years’ worth of a person’s wages makes the calculations too difficult. So, while 25 years of no saving might not be realistic, and definitely is not ideal, it makes it possible for us to calculate what would be needed to retire at age 65 for someone who is 40 now.
So, how did I arrive at the $193,331 number?
Well, experts generally think that Canadians need $1,000,000 liquid assets to retire today. That number makes sense, because a 4% dividend yield on $1,000,000 is $40,000 per year, or $3,300 per month — about what’s needed to cover rent, utilities, and groceries in Toronto or Vancouver (ignoring taxes).
How much would a Canadian need to retire 25 years from now?
Assuming that inflation keeps running at its historical rate (3% per year), then he or she would need $2,093,777. That is, 25 years’ worth of 3% inflation (1.03 to the power of 25) times one million.
So, $2,093,777 is about the amount you’ll need to retire in 25 years, if historical inflation trends persist.
How much would you need to get $2,093,777 in 25 years? A typical year’s stock market return is about 10%, so we need a 1,083% return after 25 years. 2,093,777 divided by 10.83 is 193,331. So, you need $193,331 today, at age 40, to retire at age 65 (assuming no further saving).
An ETF that could get you there
Earlier, I wrote that a 10% stock market return compounded over 25 years would take a person from $193,331 to $2,093,777. Theoretically, that’s true, but stock market returns vary. If you pick individual stocks, you might well do much worse than 10% compound annual growth rate over an investing lifetime. So the question is, which investment is most likely to give you the “typical year’s” 10% return?
The answer is, index exchange-traded funds (ETFs). These investment vehicles buy the entire stock market, giving you the market return, less a small fee, plus a tiny amount of tracking error.
A good Canadian ETF to own is iShares S&P/TSX 60 Index ETF (TSX: XIU). It’s a fund built on the TSX 60, the 60 largest publicly traded companies. With 60 stocks, XIU is adequately diversified. With a 2.5% dividend yield, it has considerable income potential. Finally, with a tiny 0.01% bid-ask spread, it’s highly liquid. Over the years, XIU has tended to return about 10% per year. Most likely, it will do the same in the future.
