|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
• 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.