Retirement Cash: Will You Have Enough?
Run the numbers and find out

BY STUART FOXMAN

How Much Is Enough? How large should your nest egg be upon retirement? Sherry Cooper, the chief economist at BMO Nesbitt Burns, offers a simple rule of thumb to answer this common question, based on a few assumptions—you retire at 65 and will live to 90, the average annual rate of return on your investments will be eight percent (before inflation), and inflation will be three percent a year during your retirement. First, decide on your required retirement income. For our purposes, we’ll say $50,000. You have no company pension plan but, together, you and your spouse will get $30,000 a year from the Canada Pension Plan and Old Age Security. That leaves a shortfall of $20,000 a year. If you’re willing to dip into your capital over the years, and spend your last cent in your 90th year, Cooper suggests you’ll need savings equal to 15 times your income. So, 15 times that $20,000 shortfall—remember, you will be getting CPP and OAS—equals a nest egg of $300,000 that you’ll need on your last day of work. Don’t want to die broke? Cooper says increase the multiple. For example, you’ll need savings equal to 22 times your income, or, in our scenario where the shortfall is $20,000, you’ll need $440,000 to have $140,000 left at 90. To put it another way. By Cooper’s calculations, for every $10,000 in income, you’ll need to build a nest egg of $150,000 to $220,000.

Until a few years ago, Marty Togman, a Toronto account- ant, wasn’t really thinking about retirement. He’d set aside money for short-term goals, maybe a vacation, but not for the years when he’d no longer be working. That changed when he turned 45.

“You begin to realize you have fewer years left in the workforce than the years you’ve put in,” says Togman, 49. “It dawned on me that the next ten years would probably be my highest-earning years. So socking away more for retirement has become a priority.”

Togman and his wife, Tali, 48, see a different kind of retirement for themselves than what their parents expected. “For that generation, one day you were working, the next day you stopped. I see retirement more as slowing down and doing the things I don’t have time for now, like travelling.”

Since people are enjoying healthier lives well into their 80s and 90s, many of us can now expect two or three decades of finally doing exactly as we please.

If we can afford to, that is.

For many, there’s a gap between the dream of retirement and the reality they face. A recent survey for Investors Group by Decima Research found that 41 percent of Canadians in-tend to retire before age 60—even though more than half of that group had no idea how much money they would need. Indeed, a survey by COMPAS Inc. for CIBC revealed that 38 percent of retired Canadians lack sufficient savings to maintain the lifestyle they had envisioned for their retirement years.

Countless seniors may watch their dream retirement fade as they discover that their savings barely cover their immediate needs. But the prospect of fiscal free fall has yet to alter most Canadians’ behaviour.
“Most baby boomers live for today,” says Steve Pearl, an investment advisor with Dundee Securities in Toronto. “They’re sacrificing their retirement for instant gratification.”

How much is enough to fund your retirement? That depends on all sorts of factors such as your desired lifestyle, financial responsibilities, other sources of income and, of course, how long you’ll live.
While there is no single magic number, Susan Stefura, a consultant with BMO Nesbitt Burns, reports that about half of her clients say that to feel comfortable they’ll need a nest egg of $500,000 to $1 million in an RRSP.

Sound high? Not when you consider that the money may have to last for 25 years—not an unreasonable duration to plan for, say financial advisors.

Even if they plan to live more modestly, many Canadians are totally unprepared for the financial realities of retirement. An Ipsos-Reid survey conducted for the Royal Bank revealed that among Canadians aged 45-plus who have an RRSP and are still working, 39 percent have less than $50,000 saved. Some 56 percent of Canadians aged 18 to 34, and 31 percent of those aged 35 to 54, don’t even have an RRSP.

“Most people don’t even think about retirement until their mid-50s,” says Pearl. “But you really need to put money away starting in your 20s and 30s to give it time to work.”

Pearl says the power of compounding makes “a huge difference”—the earlier you set aside money, and the more regularly you save, the faster your investment will grow. (An investment that earns ten percent compounded growth annually will double every seven years.)

Where will Canadians derive their retirement income? According to Decima Research, three quarters of Canadians view their CPP payments as their primary or secondary source of income after they retire.
Company pension plans and group RRSPs through an employer are other top options, although Human Resources Development Canada notes that fewer than 50 percent of paid workers are covered by those plans.

More than one in five Canadians, says Decima, are expecting an inheritance that will improve their financial situation.

Don’t count on it, says Rebecca Mand, a financial planner for RBC Investments in Vancouver. “The number of people whose parents leave them enough money to make a substantial impact on their retirement is very small,” Mand says. “And if you have a parent who has to go into long-term care, think about that cost. How much do you think is going to be left for you?”

Eleven percent of Canadians are even betting that some of their retirement income will come from winning the lottery, according to the COMPAS survey. “You laugh, but that’s a reflection of the times,” says Stefura. “Many people just aren’t realistic about where the money will come from to fund their retirement.”

The reality is that most Canadians will have to adjust their savings, modify their retirement goals, or both.

“Most people will have to keep working beyond the traditional retirement age,” says Pearl.

Certainly continuing to punch the clock is one way to create a softer landing at retirement. According to Decima Research, 72 percent of Canadians who aren’t yet retired are strongly considering working in some capacity after they retire. This is in stark contrast to the 23 percent of currently retired Canadians who still earn work income.

“My preference is to stop working as I do now, but I still see myself teaching, consulting or even working part-time,” says Stanley Magidson, 60, who owns a design and communications firm in Montreal. Magidson only started to think seriously about retirement in the last three years—“I can safely say that I won’t fully retire, both for financial reasons and for my sanity. I enjoy work.”

Whether the money is needed to help offset basic expenses or to pay for extras, many Canadians may well have to work through their golden years. Will that be an opportunity or a grim reality? To really know, you’ll have to take stock of your expectations and your costs.