It’s RRSP season again. And every bank, mutual fund, and investment company is urging you to contribute. “Save for your retirement!” is the rallying cry.
That’s so commonsense, it hardly needs explanation. But how much do you really need to save for your retirement? Sadly, most of us have no clue.
A recent survey by BMO Harris Private Banking showed that Canadians believed they should have anywhere between $584,000 and $2.4 million, to retire on comfortably. They were asked to come up with a number, and they did. But whether high-, middle-, or low-income, none had a clue as to how much they will need.
I truly believe that most Canadians will not save for a particular target sum at age 65 and then live the lifestyle that sum will afford them. More realistically, they will save as much as they possibly can, while fixing the roof on their house, buying a new car, and paying for a child’s post-secondary education.
In other words, the average Canadian will adopt the lifestyle in retirement that their capital will afford them, not the other way around.
The West Method for Financing Retirement
Taking this as my starting point, I want to introduce my own method of figuring out how much money you will need in retirement. Call it the “expense” method if you want. And let’s start with those expenses we all love to hate—bank charges.
I bank at Scotiabank, and my total bank charges in 2013 were $30. Now, how much Scotiabank stock do I need to own to generate $30 a year in dividends? (If you want to finesse this, you can adjust for the dividend tax credit and taxes, but I can make my point without doing so.)
Bank of Nova Scotia common stock currently pays $2.48 per share in annual dividends. Accordingly, I need to own 12 shares of BNS, for a total of $782.30, and my dividends will cover my banking fees.
Bank charges go up every year—that’s what banks do—but my dividends should rise by a similar amount. So if I buy 12 shares of BNS, my bank charges will be covered for life, inflation-adjusted. I need $782.30 in my retirement nest egg, or I could buy the shares right now and get started early.
My cellphone is with Telus, and it costs me about $790.00 per year. If I buy 548 shares of Telus common for $20,340.00, my cellphone charges will be covered by my Telus dividends. As my phone costs more, my dividends will also rise. Add $20,340.00 to my nest egg needs.
If I had cable, I could do the same with Rogers stock. To cover my electricity bill, Ontario Hydro bonds, and for taxes, Government of Canada bonds. To cover my rent, I can use RioCan REIT units. Food? Sobey’s shares.
Eventually, as I cover off all my expenses, I will be basically living expense-free, and I won’t have to encroach my portfolio either.
The good news? If you do this exercise, you’ll have a much better idea of how much you really need for retirement. The last time I did the full process on my own situation, I believe I needed about $300,000 to live expense-free—not $584,000 and not $2.4 million.
I encourage you to try this simple but effective method to determining how much you will need to retire.
Courtesy Fundata Canada Inc. © 2014. David West, CFA, FCSI, is a veteran money manager and a regular contributor to Fund Library. This article is not intended as personalized advice. Investments mentioned are not guaranteed and involve risk of loss.