How much do I need to save in order to retire the way that I want to? It’s really a simple calculation.
The formula takes into consideration the inputs that each person chooses in regards to how much retirement income they want, how long they expect to need this income, how much retirement funds they have right now, how much they want to leave when they pass away and what rate of return that they assume that they will get in the future. And don’t forget about inflation.
In my opinion, everyone should know their number.
The problem is that a significant amount of research is showing that most Canadians aren’t saving enough!
Doesn’t that seem odd? Instead of building up a stock pile of savings to use during their upcoming retirement, people are continuing to spend almost everything that they earn.
Why? Possibly they think that they do not need to save any more for their retirement nest egg because they already have enough invested in such things as their homes or their investment portfolios?
Maybe it is a conscious effort to temporarily maintain their current lifestyles and they have a formulated a financial plan to make up the deficit in their savings later?
Perhaps they are counting on receiving ongoing generous government support in their retirement years, especially for increasing costs of their medical care?
Whatever the reason for the low savings, many economists warn that this phenomenon exists at a particularly bad time with the bulge of baby boomers approaching retirement age.
Personally, I think that there are three reasons why this boomer demographic age wave will eventually drive up savings rates and reduce consumption.
First, I believe that Canadians will have to come to grips that they will need to save more than their parents did simply because their pension and medical benefits are likely to be far less generous than what their parents received and will almost certainly have to be cut sharply.
In fact, just this year, the federal government announced the increased age requirement to qualify for the CPP payment.
Second, unlike their parents, I don’t think that people can count on their homes being good investments in the future.
I agree with those who have postulated that boomers are likely to be bidding against each other as sellers when they retire and they all downsize en masse. That should put substantial downward pressure on home prices in coming years.
Against that back drop, everyone should have a strong incentive to pay down their mortgage in order to reduce the interest expense of home ownership.
Third, people will come to realize that they have no assurance that the capital markets will continue to provide the historically high rate of return that they have become accustomed.
That means that if they want to retire with the same standard of living, they should count on saving more not less. As I have said before. It’s a simple calculation.
What’s your number?
