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When $100,000 isn't enough

Monday October 24, 2011


Fidelity Investments recently released some statistics that showed that the average amount in its customers’ 401(k) plans is $72,700. The 401(k) is the U.S. equivalent of our Registered Retirement Savings Plan (RRSP) program here in Canada. That sorry statistic is similar in Canada, where according to Statistics Canada, about 40% of Canadian families do not even have an RRSP. The problem is that even for those who have an RRSP and are close to retirement, $100,000 isn’t enough.

What if you only have $100,000 and you’ve lost 20% in a market correction? You will likely recoup that loss in six months to a year. The real problem that many people ignore is that if you are close to retirement, you will need considerably more than $100,000 in your RRSP to maintain your lifestyle. It’s different for the fortunate few who are in a generous government-sponsored defined benefit pension plan, under which you are guaranteed regular specified payments when you retire). People with a defined benefit plan will likely receive $2,000 to $3,000 per month plus CPP, OAS, and their own savings (that is, RRSPs, TFSAs, and income from non-registered sources).

If you are not in a defined benefit pension plan and are close to retiring with about $100, 000, the problem is that this will give you an ongoing stream of income of approximately only $500 a month, before tax.

Add about $800 for CPP and $500 for OAS and that’s only $1,800 a month, again before tax. If your home is paid off and your partner also makes $1,800 a month, you can probably make it work. If either partner’s CPP is lower, your home not paid off, or you have less than $100,000, you will likely be working well into your 60s and maybe 70s, if your health allows it. If not, you will be among the retired poor who are not golfing and taking trips to sunny places.

Simple steps to a comfortable retirement

Start investing monthly. This will boost your nest egg and let you buy during corrections. You get paid this way, so invest this way. Which investment vehicle you buy depends on your income and tax situation.

Buy on dips. When the markets correct and are the top news story, don’t call your financial advisor to check your portfolio. Instead, call him or her to add money while companies are “on sale.”

Move slowly to safer investments as you enter your pre-retirement phase (10 years before your planned retirement) to limit downside risk.

Pay off your mortgage if possible and reduce (or eliminate) debt. You don’t need these extra debt payments in retirement when your income is not increasing (remember, there will be no bonuses, promotions, or other employment-related windfalls that may have boosted your cash flow during your working years).

Limit the use of credit and pay credit cards in full. If you can’t pay in full, you might be digging a hole that will be difficult to get out of.

If you are in the situation I described above, do not panic. Just do some budgeting and start increasing your financial assets. It is much faster to go from $100,000 to $200,000 than to go from zero to $100,000. If you have $100,000 and the market goes up 10%, and you also invest $500 a month, you can go from $100,000 to $120,000 in one year, whereas going from zero to $20,000 may take three years.

Another benefit is that if you invest $500 a month in an RRSP, you will likely save about $2,000 in income tax too. You can move quicker to retirement and save taxes at the same time.

So even if you’re getting close to that retirement day, and you have only a small amount set aside, don’t despair! There’s much you can do, and with the help of a good advisor, you can still come out ahead.

 

 

 

Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.


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