Yes Virginia, you do have to save!
Do I really have to save for the future? “It is so much more fun to spend my money on clothes, eating out, vacations etc. Or, there is no money to save because I need it all for the mortgage, kid’s activities, clothes, food, gas etc. There is nothing left.”
Well, you would be lucky enough not to have to save, if you fall into one of these categories:
- You are getting a large inheritance and your parents will not use up the money on health care and travelling while alive or giving it away to charity when they die
- You marry rich and stay married (i.e. no divorce and if you do get divorced he is very generous and or has a poor lawyer)
- You are going to die young so may as well spend your money before you go
- You are comfortable living on only $1,700/month before tax (from the Canadian Pension Plan and Old Age Security)
- You know you will win the lottery in the future
In every other case, yes you do need to save for the future.
It is simple math. The average life expectancy for a female is 83 years old (according to Wikipedia). If you retire at 65, that is 18 years that you need to have money to live on. The current maximum monthly income from the Canada Pension Plan at age 65 is $1,134/month before tax (and lots of people don’t get the maximum). The current maximum monthly income from Old Age Security is $587/month before tax. That is generally not enough to maintain someone’s lifestyle beyond the basics.
So, what can you do?
Save money. If you have a pension plan at work, that is terrific and yet even it might not be enough. Not everyone has pensions and they are becoming less common. The government has set up Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Plans (TFSAs) to encourage Canadians to save. Use them.
How much do you need to save?
It depends on how much you will spend in retirement. Let’s assume that you have a chunk of money saved by age 65 that will last you until age 83 or even age 90. If you pay 25% taxes and earn 5% or 6% interest (at 2.5% inflation), you will need these amounts to provide $3,000 or $6,000/month income.
|$3,000/month income||At 5%||At 6%|
|To last to age 83||$581,500||$546,000|
|To last to age 90||$775,400||$712,000|
|$6,000/month income||At 5%||At 6%|
|To last to age 83||$1.2 million||$1.1 million|
|To last to age 90||$1.55 million||$1.4 million|
They may look like large numbers, so the sooner you start to save, the easier it will be to get there.