Retirement

We are often asked by people if or when they can retire based on their savings.  Bay Street always says we need to have liquid assets totalling over $1m to survive in retirement.  This is nonsense.  The key is to own a paid off home and be debt free. If one achieves this, all the average person needs is around $250,000 ($450,000 for a couple) to maintain a middle-class lifestyle in retirement.  At the same time there will be the monthly Old Age Pension and CPP which can add an additional few thousand a month. 

How does one prepare for retirement? In addition to savings, there are other things to plan for that are just as important such as a proper will drawn up.  If you do not have one, do so immediately and then pick an executor.  I always recommend you must be careful picking one for your estate.  You want someone who will obey your wishes fully.  Lawyers and accountants will do the job, but both are very expensive and most likely have no emotional commitment to you as a client.  Plus, they never have enough time to do an estate all at once.  Because of this we suggest a reliable family member or a close friend who you trust.  

We then ask the client what they plan on doing when retired.  Most never give it much serious thought. One client told me what she planned, and I then mentioned that is great for first few weeks, but what are you going to do with the rest of your life? She ended up working two more years. 

When it comes to saving for retirement always start early. We are groomed to save for a downpayment before anything else.  We disagree.  If the average home price is reasonable, it can make sense, but today it is better to focus on retirement savings and favor the significant compound returns that financial assets can offer over time. Based on Canada’s average home price in June the bare minimum downpayment should be $70,000, although $138,000 (20%) is better because it will qualify for a CMHC loan. If you can save the latter by 35, you are better off building a retirement portfolio first rather than save for a downpayment.

Time is the most important variable to growing money, and the more you have the better off you will be.  The average return for most stock indices is roughly 7% annually which means your money will double every 10 years, if reinvested.  However, if done properly, one should be able to double the average return. This is why we suggest start by building up as much savings as possible at a young age.  

We always recommend saving $10,000 ($20,000 for a couple) and invest in GIC’s first. This money is strictly for emergencies.  After that, begin a retirement fund of $100,000 in safe blue-chip companies that have a history of increasing dividends.  These dividends can be used to help build a downpayment fund. Once the downpayment is saved, the income from the portfolio can then be reinvested.  

When buying a home, always try and pay it off ASAP because the tens of thousands of dollars in interest you will save can be directed to retirement savings. These savings are easily achieved by choosing a weekly mortgage payment or by adding extra cash each month. On a 20-year mortgage each dollar of principal paid early can result in savings of up to $3 in future interest charges and will shorten the life of the mortgage by a few months at least. The faster a mortgage is paid down the closer one becomes to a comfortable retirement. 

Make sure your equity portfolio is filled with top-quality Canadian firms that have a history of raising their dividends annually, like all our recommendations. As well, get rid of all mutual funds, options and ETFs. These are designed solely to make the banking industry rich. 

As you age, increase holdings in insured GICs until they become roughly 70% of your portfolio at retirement, in today’s economy.  Once you enter this chapter of your life you cannot afford to take any major losses.  If one does it is almost impossible to recover from them because time is now running against you.  Plus, we never know when fate will deal us a bad hand, like poor health. 

Never gamble. Commonsense is always your best guide to saving for retirement. Stick to blue chip securities like banks, utilities, energy and the major retailers because these investments will always grow with the economy. The main key to investing is, if possible, always re-invest all income and capital gains.  Even more important than having a large nest egg, always settle in a life that keeps your mind and body active. Neglecting both will result in a shortened retirement making the money you worked so hard to save irrelevant.