subscribe to the RSS Feed

Wednesday, March 29, 2017

What’s It For?

Posted by Tim Stobbs on February 18, 2015

You have likely already been reminded you should be investing some money in your RRSP today.  How do I know that?  It’s the season for it so most people via the 1000s of ads out there are told they really should be investing their money.

Yet I’ll offer you a more basic question than: RRSP or TFSA, stock versus bond, or even index fund or actively managed…..the question is: why?

Pardon?!?

Why are you saving and investing the money at all? What is the purpose of the investment?

*silence*

Need a hand? Perhaps the answer is: to retire.  Which is a good idea, but what does that look like?

*longer silence with confused look*

Far too often we save blindly because we fail to really understand what sort of lifestyle you want in your retirement.  After all, depending on the lifestyle you want that will drastically change how much you should be saving and how early you can retire.

For example, let’s say you have a couple who is in their 50s and they have been really good savers and have $500,000 in investments and a paid off house.  Do they need to work any longer?  Perhaps it depends on the lifestyle they want.

If they choose a modest life of mostly hanging around the house, being involved in the local community helping out with a few organizations, reading a lot of books and playing with the grand kids, they don’t really shop a lot and when they do they tend to buy high quality items that last a long while…well depending on the exact numbers they could retire in a just a year or two.  Yep, if they don’t need much income, perhaps $24,000 a year, they could potentially retire shortly.

But if they want to travel the world for four months of the year, enjoy shopping a lot and are real foodies that enjoy all the finer things in life.  Again it depends on the exact number, but if they spend like $5000/month.  They may very well have to keep working until they turn 65 or later.

It all depends on the why.  Why are you saving?  What sort of life do you want to lead and what is stopping you from doing that at least in part right now before you even consider retiring?

The illusion is that someone one choice is better than the other, when it fact, what matters most is which one appeals most to you.  If you have never really spent on $5000/month when you were working, what on earth do you think you will be doing when you retire?

What do most retirees end up spending? It varies but on average they spend $30,000 to $40,000 a year.  That’s it.  No huge lifestyles of the rich and famous, but rather a modest but happy life having lots of time to do those things you enjoy.

You could do less than that if you want, especially if you consider your mortgage was paid off.  So if you aimed for $30,000/year target you could be retired rather easily on $750,000 in investments.  Yep, that’s it. Forget about the million dollar mark, you don’t need it.

So if someone tells you they need at least $2 million or more to retire…I would ask why?  It won’t change the answer in some people’s cases, but more often than not they don’t understand the why and end up with overly large targets.

Instead, take the quicker way out…think about what you really want from your retirement and then plan around that.  The more detail you can provide the better plan you can make.   It won’t also be easy to do, but in the end you at least know exactly why you are putting money into your RRSP or TFSA.

What are you saving for?

Comments

5 Responses to “What’s It For?”
  1. Rick says:

    I retired at 38. Went back to work part time at 39; then retired for good at 46. I own my home, no mortgage. No debt at all. I get up when I like; usually the dog will make me get up, to let him out. We have a couple of cups of coffee, then go for a walk around the property. I watch the news and markets; and read. I go out to eat when I like. Enjoy beer and wine. I want for nothing. I’m a long term planner and wanted to retire when I first started working at age 14. This article is bang on! You don’t need as much as you think.

  2. Kevin says:

    Not only is saving in the TFSA good for retirement, but many people forget that life can change at any moment and having those savings during the good times can really help out if you end up in an accident and disabled, or suddenly get laid off.

  3. Paul N says:

    Will $750,000 suffice if theere is more of the level of inflation we have had over the last 5-10 years? Please 2% we all know is a BS number. It’s far more then that. They changed the “basket” of goods they use to calculate true inflation a few times. I’m sure some of your readers eat Bacon and cheese. Smaller packages and twice the price. Oils decline is temporary and distorts the rate as well.
    I don’t know if that figure will maintain a certain standard of living over time.

  4. theresa says:

    Saving to travel!! Every time I run the numbers it says we have more than enough for a comfortable retirement….just need hubs to pull the plug!
    He says a year, I say why not now?

    and yes, I love bacon!! (but it’s a treat..)

  5. Tim Stobbs says:

    @Rick – Sounds like a good life to me!

    @Kevin – Oh very good point. The TFSA is more flexible if you need it to be.

    @Paul N – That $750,000 number ignored any CPP or OAS which should easily cover any inflation as you age, so yes it should work (assuming you paid off you house). CPI is an estimate of inflation and doesn’t cover your personal situation. I know I ran the numbers myself once and came out at around 1.7% for the given year, but I didn’t have a mortgage so I didn’t see any savings as interest rates went down.

    @theresa – You remind me of a co-worker, she could retire today, but keeps working to fund her travel habit.

home | top