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In the movie We’re The Millers, the thoroughly unsavoury Scotty P., played by Mark Young, wears a prominent tattoo, visible no matter what shirt he wears: No Ragrets.
“Not even one? Not even a single letter?” asks Casey Mathis, played by Emma Roberts.
Regret is one of the most powerful emotions. Miss an opportunity and it will revisit you frequently through life. When it comes to retirement, it can be one of the most expensive.
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CNN recently reported on the looming retirement crisis south of the border. The concept of pension plans, once the bedrock of employee benefits by responsible employers, has been decimated, with fewer than one in 10 Americans enrolled. Only half of employed Americans contributed to a 401(k), the American equivalent to our Registered Retirement Savings Plan.
The network interviewed several American workers for whom retiring at 65, or at all, is but a pipe dream.
From a humorous video by electronic greeting card company JibJab, and sung to the tune of Oh, Susanna: “My dreams of a retirement have gone up in a blaze, and I’ll be scrubbing toilets till they stick me in the grave.”
It got me to wondering: how are we doing in Canada?
Not great, but we are in better shape than our neighbours. According to Statistics Canada, approximately 6.9 million Canadians participate in employer pensions plans, or about twice the number per capita of Americans and, conversely, Canadians participate in RRSPs at about half the rate Americans contribute to their 401(k).
Still, between the three pillars of retirement planning in Canada, more than half of working Canadians contribute to either a private pension plan, a personal RRSP or a tax-free savings account, again according to StatCan. In 2020, that number hit a high of 58 per cent.
As well, we’re getting better: in 1976, private pension plans comprised 12.1 per cent of total income by retired Canadians 65 and older. In 2019, that number had grown to 35 per cent.
The number of Canadians who don’t contribute to RRSPs is offset by a large number contributing instead to tax-free savings accounts. While a TFSA contribution doesn’t generate a tax refund like RRSP contributions, any principal or growth can be withdrawn at any time without incurring income tax.
Canadians also benefit from two national programs, the Canadian Pension Plan, worth about $1,000 a month starting at age 60, and Old Age Security, worth about $720 a month when it’s available at age 65.
The challenge for the investment industry in Canada is encouraging younger workers to start saving now. Thanks to the value of time, starting early means it takes less money per month to equal significantly more money in retirement.
That’s important: you don’t want to spend all of your money on tomorrow and have nothing left for today, since nobody is guaranteed any number of tomorrows. Starting early allows you to build a healthy retirement nest egg without living a life of self-inflicted poverty.
One way to look at it is this: every $240,000 you have in the bank at retirement is worth $1,000 a month in income, assuming a five per cent withdrawal every year. The math genius reading this realizes that’s good for 20 years of income, but it actually ends up being longer, since the money not withdrawn continues to earn investment income. We’ll ignore that extra growth, since it will mitigate the impact of inflation.
Now, how much do you have to contribute to get that $240,000? Over 25 years, at five per cent growth, $500 per month translates into $218,536, according to an investment calculator at Fidelity Investments.
If you wait until you’re 10 years from retirement, you need to kick in $1,600 a month.
Start working with a retirement planner today. Factor in any private pension plan your employer may offer and consider the type of lifestyle you want in your retirement years.
After all, you don’t want to wake up at 65 with a bunch of financial “ragrets,” do you?
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