Do you really need $1 million to retire?
The truth behind five popular retirement myths.
People ask me about their investments. People ask me about wills and estates. But the one topic that most people want to talk to me about is retirement. It's a reality we'll all have to face and yet, for all that has been said about it, there is still a lot of confusion surrounding it. That confusion can be paralyzing. I've spoken to people across the country who have not taken steps to prepare for retirement because they were afraid of making a mistake. While some don't know where to begin, others think that either they don't need to plan or that doing so is pointless — they'll never be able to save enough. They're wrong. Let's tackle the most dangerous myth first.
Myth # 1: Government programs such as CPP & OAS will take care of my retirement needs.
To be sure, CPP, OAS & GIS (to some) are pillars of retirement planning. But they will likely fall well short of covering your income needs in retirement. At least your company pension can make up the difference, right? Not for the majority of Canadians. Only 38 per cent of the workforce is covered by a pension at work. Of those, defined contribution plans are increasingly becoming more popular than defined benefit plans. Even defined benefit plans are susceptible to market downturns. Several of the country's big pensions have felt the funding squeeze caused by the market downturn. Investors should take responsibility for funding their own stable stream of income in retirement through RSPs, TFSAs & non-registered accounts.
Myth # 2: I need a million dollars to retire.
This is the opposite of the first myth. Some people are scared by the mistaken belief that they need a million dollars for retirement. I don't know why that number gets tossed around so often. The problem is that, for some, it makes the situation seem hopeless and causes an undue amount of fear and worry. I want to be absolutely clear. IT IS A MYTH. According to Malcolm Hamilton of Mercer, for the vast majority of Canadian Seniors, 50 per cent of pre-retirement income is enough for a comfortable retirement. Most financial planners use a figure closer to 70 per cent to be safe. So how much do you need? Let's do a quick calculation:
Statistics Canada says the median household income for a married couple is $63,900 (gross). Seventy per cent of that means a retired couple would need $44,730 a year.
Average OAS is $489.12/month x 12 months = $5,869
Average CPP is $505.11/month x 12 months = $6,061
Therefore, the income from government sources is $11,930 for each spouse. The total income (for both spouses) is twice that amount or $23,860 a year.
Assuming you are one of the 62 per cent of Canadians without a pension plan, that means you have to fund the remaining approximately $21,000 a year. According to Russell Investments Canada's "Retirement Rule of $20", every $1 of annual retirement income will need to be funded by $20 saved by the day of your retirement. That means the couple in our example needs $420,000 to fund their $21,000/year retirement shortfall. A far cry from the mythical $1,000,000.
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