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How Much Will You Need to Retire Comfortably?

retire comfortably

Up until recently, $1 million was considered to be the gold standard for retirement savings. These days, depending on where and how you want to live, $1 million may not be enough to retire comfortably.

Many studies have been done to determine how long a nest egg of $1 million would really last. This is based on average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care. Where you decide to live will be part of determining how long your savings will last.

Let’s take the example of a 65 years old couple retiring today with $1 million in savings. This should generate $40,000 a year, adjusted for future inflation and assuming a sustainable withdrawal rate of 4 percent. If they get CPP and OAS, they could receive around $6,000 a month of income before taxes. This level of income might provide a comfortable lifestyle in a small rural community such as Stettler, but may not be so great in a larger city or retirement area such as Kelowna.

If we number crunch the future income potential for a 40 year old Gen Xer hoping to have $1 million saved by age 65, this will only generate an inflation-adjusted $19,000 a year when all is said and done. And a 32 year-old today planning to retire at 65 could end up living below the poverty line when adjusted for future inflation. Economists call this “Million dollar poverty!”

Considering that many Canadian families now spend most of their income on monthly expenses alone, they are unable to save much for retirement. We are coming up to a future financial storm and pension crisis, made even worse with all of us now living longer.

There are only two ways to overcome “million dollar poverty”. Either earn more or spend less. Those nearing retirement may need to consider delaying retirement or taking on a side job and saving 100% of that income.

We may need to take a hard look at our expenses and differentiate between what’s necessary and what’s discretionary. Then identify expenditures that can be cut back. Some are small, like lunches, but they add up. Others are big, such as expensive homes with big mortgages, private school for children, or buying expensive vehicles, boats, RVs, etc. that depreciate faster than they get paid for.

Our parents and grandparents grew up in an era where many received their monthly work and government pension checks. Today, work pensions are almost non-existent and people need to fund their own retirement. It’s easy to underestimate the enormity of this challenge.

It’s also good to be remember that about 80% of our lifetime medical expenses happen in the closing decade of our lives. These are expenses that many are woefully unprepared for.

If you’re in need of help to figure out what to do to better prepare yourself to retire comfortably, seek out a trusted financial professional to set you up on a budget and get you on track.

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