Retiring? $1 Million Isn’t Enough Anymore

Are you retiring soon and wondering whether you have enough money to retire on?

You’re not alone.

Many Canadians are increasingly worried that their savings won’t be enough to get them through their golden years in good shape.

There was a time when Canadians could count on generous employer-sponsored pensions to pay for their retirements. These days, such pensions no longer exist outside of government. The Canada Pension Plan (CPP) pays next to nothing unless you wait until you are 70 to claim it. Between the decline of defined-benefit (DB) pensions and paltry CPP/Old Age Security payments, most people don’t have much pension income anymore. This leaves savings to pay for the overwhelming majority of their retirements.

Unfortunately, most Canadians simply don’t have enough saved to retire comfortably. StatCan data shows that by the age of 60, most Canadians have between $350,000 and $370,000 in private pensions (i.e., Registered Retirement Savings Plans and Tax-Free Savings Accounts). At the same time, data collected by financial advisers shows that it actually takes more than $1 million to retire comfortably these days. So, while Canadians look at their $300,000 RRSPs and wonder whether they can hit a million, the truth is even that million probably isn’t enough — especially if you live in a big city!

In the ensuing paragraphs, I’ll explore why $1 million just isn’t enough to retire on anymore, and what you can do to retire on a reasonable timeline.

The costs

To show that it takes over $1 million to retire comfortably in a typical Canadian city, we first need to define what “living” entails. Here are some typical costs for a Canadian retired couple:

• $2,405 – typical rent for a two-bedroom apartment.
• $200 – a typical monthly utility bill.
• $600 – average grocery expenses for a Canadian adult.
• $100 – the cost of an average health insurance plan.
• $37 – an average Canadian family’s monthly spending on streaming services.
• $100 – allowance for additional entertainment expenses.

The above sums to $3,442 per month for the average Canadian. So, we have $41,304 in average annual expenses for a single Canadian retiree. If you have dependents, you’ll spend even more!

The earnings

Now, let’s look at how much yield it would take to earn $41,304 in annual dividend income.

$41,304 equals a $1,000,000 portfolio yielding 4.1304%. This is a problem because the Canadian stock market has only about a 2.37% dividend yield currently. If you throw $1,000,000 into iShares S&P/TSX 60 Index Fund, you’ll only get $22,210 back in annual income. The income could grow with time, but it’ll take a long time to get to $41,304!

So, $1,000,000 invested in the total Canadian stock market won’t produce enough income to retire on.

You could try active investing as an alternative. By investing in higher-yield assets, you could get enough dividends from a $1,000,000 position to retire on.

Take Enbridge (TSX: ENB) stock, for example. It’s a pipeline stock that has a 5.38% dividend yield. If you invest $1,000,000 into Enbridge, and the dividend doesn’t change, then you should get back $53,800 in annual dividend income. Here’s the math on that:

$1,000,000 in Enbridge seems to be enough to cover a single Canadian’s expenses in an average city. The problem here is risk. Throwing all your money into one company, or a small number of companies, exposes you to the risk of the company going bankrupt or losing the majority of its earnings power. I’m not saying this will happen with Enbridge, but it could.

Foolish takeaway

The bottom line on saving for retirement is that you just have to stick it out. There was a time when retiring at 55 might have been viable. Today, it’s not, at least not for most Canadians. You’ll likely need more than $1,000,000 to retire, and it takes some time to get that much money.