Friday, January 19, 2018
Freedom 55? Is that even possible?
If you go back 40 years ago, early retirement was much more common. It makes sense when you think about it. If you were only living until age 70, you might want more than 5 years in retirement. These days it is not uncommon for people to live well into their 80’s and even 90’s. This amazing ability to live longer is not without its problems. What if you outlive your money? That is a huge worry for many people. This makes retirement planning extra important. Inflation, life expectancy, and investment return all play huge factors in a successful retirement plan. I have met some people who have lived longer in retirement then they lived in their working years. Despite this, it is still possible to retire early. In order to do so, you have to be deliberate and make it a priority. In today’s post, I will touch on some basic retirement planning and show you how to crunch the number. It won’t be easy, but you can retire early. Let’s get started!
What’s your budget?
I mention all the time how important a budget is. It becomes even more important when you are retired. The reason is simple, you have no more money coming in. In order to know how much you need to save for retirement, you have to have a rough idea of what you will need annually to live on when you stop working. This can be done by adding together all your monthly expenses. For some households, this amount can be quite large during your working years. It is important to understand that reducing your household expenses will only help you as you move forward in life and then again in retirement. Once you know what it costs you to live every month, you can subtract items that will not be there when you are retired. This may include your mortgage, caring for children or even certain recreational activities. Once you know this number, you have a tangible total to work with.
The Most Important Money Habit You Can Ever Develop – Budget Boss
Add in the fun
For some people, relaxing on the porch is good enough for them in retirement. Others wish to travel the world or spend winters in Florida. When you are earning a living, it is important to factor in the fun you wish to have in retirement as well as regular monthly expenses. Most people won’t be living under a rock, so add in some slush money so you can enjoy yourself in retirement. Also, make sure you add in some lump sum money if you plan on making big purchases once you retire. You don’t want to take away from your basic living expenses because you bought an RV.
Find your total number
When you add the number of what you will need to live off every month, and what you want to have for fun, you will have your total number needed for retirement. Let’s say you have come up with the total needed per month to live comfortably in retirement is $3500. That will pay all your bills and give you enough to do the day to day things you wish to do. Now let’s say you wish to take 2 vacations a year that will cost you $4,000 each. So your total is $42,000 annually for living expenses and $8,000 for travel. ($3500 x 12 = $42,000, $4000 x 2 = $8000) That means you will need a grand total of $50,000 a year to live in retirement.
Pick your retirement dates
The standard thinking behind retirement age is the good old age 65 years old. Most people use this as a benchmark. For all you ambitious people out there, you can throw in some earlier dates. For this example, I am going to use the ages 55, 60 and 65. To come up with what you need for retirement, you simply subtract your age from the date you wish to retire. Let’s take the age of 35 for our example. If you wish to retire at 55 you have 20 years to save for it. For age 60, you have 25 years and age 65, you have 30. Now you have to think about how many years you will live in retirement starting from the day you retire. Obviously, the earlier you retire, the more years in retirement you will have. I pick age 95 for retirement planning purposes for the simple fact that I do not wish to outlive my money. If you die before 95, you just have a bigger estate you leave your loved ones. Here are the retirement years laid out:
Age 55 retired: 40 years in retirement
Age 60 retired: 35 years in retirement
Age 65 retired: 30 years in retirement
40 years in retirement is a long time! Can see how you might have to change the way you live your life while you are working to retire early? So, let’s take a look at the big numbers you will need. Remember we picked 50K a year as retirement income and age 35 as our starting date.
Retire at age 55: $2,000,000
Retire at age 60: $1,750,000
Retire at age 65: $1,500,000
Scary numbers, aren’t they? You might be thinking: How am I able to do that? Wait, my friend, it gets worse……
Inflation is just plain nasty
We all know that the price of everything goes up every year. I remember when I was a kid I could get a Jamaican Beef Patty and a can of Coke for a buck at lunch. Retirement planning must take into account inflation. Let’s take a look at what those numbers look like:
$2,000,000 equals $2,900,000 in 20 years
$1,750,000 equals $2,700,000 in 25 years
$1,500,000 equals $2,800,000 in 30 years
These are even scarier than the previous numbers. You might be thinking, how am I able to make all that money in my lifetime? A few things we haven’t taken into consideration is government pension benefits and possible employment pension benefits. Those vary from person to person, but let’s look at government benefits. The maximum Old Age Security benefit you can receive in Canada is about $7,000 annually. The maximum Canada Pension Plan benefit is around $13,000 a year, but let’s remember you only get the maximum if you have contributed to CPP your whole life. This is why understanding government benefits are very important, because not all qualify, and amounts can be lowered from lack of contributions or even clawbacks due to higher income. So how do we get to those big numbers?
Inflation Calculator – Bank of Canada
The eighth wonder of the world, compound interest
Achieving these numbers is not possible without sound investing and dedication. Let’s take a look at what you will need to save annually to reach those milestone numbers.
20 years saving and investing, 10% rate of return, 50K annual contribution, $2.8 million saved
25 years saving and investing, 10% rate of return, 25K annual contribution, $2.4 million saved
30 years saving and investing, 10% rate of return, 15K annual contribution, $2.4 million saved
You see the sacrifice needed for these ambitious goals to occur? Also, these numbers are based on a 10% return, so that is always a question mark. They also don’t take into account taxes upon withdrawal and inflation during retirement. Let’s take a look at something far more reasonable.
If you contribute $450 a month for 35 years and receive an 8% rate of return, you will have $970,832 at the age of 65. If invested in a Tax-Free Savings Account, you will be able to access that whole amount without paying any tax. The $450 monthly is roughly the maximum annual contribution for the TFSA. That is an acheivable goal for almost everyone.
TFSA Calculator – Get Smarter About Money
Variables
Life throws you curveballs so let’s look at a few of them. First off, you may not need 50K a year in retirement. I picked that number because it is a nice round number. Secondly, you or your spouse might not even make it to retirement, and therefore insurance is needed to fill gaps that may be caused by illness, injury or even death. Thirdly, you may not even fully retire and still work part-time throughout your whole life. That is becoming the norm these days. These numbers also don’t take into account inheritances, which you might be expecting. We also might not even have government retirement benefits 30 years from now. Also, predicting investment return is not a full proof thing to do. It has to be monitored closely over time to make sure your objectives are being met. So many variables!!! This is why careful planning and monitoring are needed.
You Think Insurance is a Waste of Money? 5 Reasons Why You Are Wrong! – Budget Boss
So, what’s the point of all of this?
The point of all this is simple. You must save for retirement. Whether you want to do it early, or at age 65, the day will come when you can’t or don’t want to work anymore. With numbers this large, you can see why the Financial Independence, Retire Early (FIRE) community preaches minimalist living and aggressive saving. In order to save a good amount every month, you can’t be spending all your money, it’s just that simple. While many of these numbers may seem unrealistic, there are people who do it.
It also shows the importance of starting your retirement saving early. The sooner you start, the less you will have to save annually. The sooner you start, the more compound interest you will make. The sooner you start, the more opportunity you will have to retire early. It’s just that simple. You can break this post down into 4 key points.
Live below your means
Save regularly
Invest for long-term growth
Protect your savings
If you do all those things, the numbers will take care of themselves. If you do not, your retirement income may choose you, instead of you choosing it.
Thank for tuning in for FIRE Week here at Budget Boss. Remember, retirement planning doesn’t have to be boring, and it is important for everyone. Tune in next week for a new, exciting topic on personal finance. If you would like to start planning your retirement, please feel free to message me at joe@budgetboss.ca. Have a great weekend Bosses!
“Whether you are just entering the workforce or nearing retirement age, planning for the future is critical.” – Ron Lewis
Email – joe@budgetboss.ca
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