You Can Retire Comfortably by Not Driving a New Car - And Other Tips
Q: Lately there’s been a lot of attention in the news about retirement. My wife and I were only casually following the stories until they started giving more specific details about how people are working longer, how little most have saved and how depending on government pensions could leave most people short. We still have time to work and are trying to save, but life is expensive with two teenagers, post-secondary education on the horizon for both, as well as aging parents over-seas. Despite all of our expenses, is there anything we can do to set ourselves up to retire comfortably? ~Chris
A: Retirement undoubtedly looks much different now than it did even 10 or 15 years ago. According to Statistics Canada, the average age of retirement went up from 61 in 2005 to 63 a decade later in 2015. More than 10% of people over the age of 65 are still working. And most middle-income Canadians who don’t have an employer pension do not have nearly enough saved to retire.
However, despite these types of statistics, there are more options than ever to make lifestyle choices that benefit your family now as well as plan for later. In fact, retiring comfortably is as much about what don’t do, even now, years before retiring, as what you do.
Here’s what you can do well ahead of retirement, to set yourself up to retire comfortably:
Is Always Driving a New Car Worth $4 Million?
Deliberately not having monthly debt payments - or minimizing your monthly debt payments - is a really smart strategy for setting yourself up to retire comfortably. Not only is it a good habit during your working years, it can help you accomplish your financial goals.
Consider this: the average Canadian car loan payment is $570 per month. If someone invests this money from age 25 to 65 in mutual funds or an index fund and receives an average rate of return of 11% (what the S&P 500 has done over the past 70 years), they will have over $4.2 million by the time they reach age 65.
Think about buying a quality used car whenever you need a vehicle and investing the difference. Given the above scenario, if you saved $300 each month, spending no more than $270 a month for a payment on a good used car, you’d still have saved $2.2 million over the 40 years.
And if you start saving your $300/month later, like when you’re 40, and save for 30 years until you’re 70, you’d still end up with $758,000. It’s never too late to start because even starting late, still leaves you with more than if you didn’t save at all.
Teach Your Children to Save and Manage Their Money to Pay Themselves First
We all too often hear of retired parents struggling to make ends meet because they helped their adult children financially. Maybe they gifted a down-payment for a house, paid for post secondary education, or helped extended family with a loan that hasn’t been repaid as agreed. Regardless of the reason, help your children learn smart money management skills while they’re still under your roof.
If your teens work part-time jobs, encourage them to save at least half of each pay cheque. Some of that savings should be for their long term goals, the other part for shorter-term goals like buying a car or saving for education costs. Saving this much of each pay cheque, also known as “paying yourself first,” and budgeting carefully with the rest teaches them to live well below their means, a skill even many adults find extremely difficult to master.
Adjust Your Lifestyle Expectations and When You May Retire
There’s no magic trick to retiring comfortably; it’s a series of small steps and wise choices that add up to not worrying about money when we’re no longer working. Making wise lifestyle choices means spending on what’s truly important to you, rather than on “stuff” to keep up with the Joneses.
Some key things to keep in mind are:
- Start planning as early as you can, even if that just means starting your RRSP and having automatic transfers go into it each pay day.
- Plan to pay off your mortgage. It has become much too commonplace to keep refinancing a mortgage to pay off other debts. Making mortgage payments late in life means delaying retirement or selling your home. Remain in control of your circumstances by paying off your mortgage as soon as you realistically can.
- Anticipate health care costs as part of your overall planning, including what your living arrangement will be when the time comes that you no longer can live on your own. Discuss plans with your family so that they are aware of your goals and plans, and why you are choosing to live within your means.
- Pay off debt before you retire. You will not be in a position to scale back your income if you need the money to pay your household bills. If you need help, contact us sooner than later.
Learn to Live with a Spending Plan – Try Out Our Interactive Budget Calculator
Most people think that budgeting is all about deprivation and limitations. Nothing could be further from the truth! A budget is simply a spending plan, which helps you determine how you want to use your money. It helps you allocate the money you earn so that you spend it in ways that help you achieve your goals.
If you’ve never used a budget, try this interactive budget calculator and see how your budget changes depending on how much you save and spend. You can even decrease your income to see how living on reduced income during retirement will affect what you can afford to spend and if you’ll be able to manage your debt payments.
Take an Interest in Personal Finance Topics
As you begin to accumulate savings and invest for your future, take an interest in personal finance topics. Have some awareness about the markets and gain an understanding about investing. This will help when you talk about your money with your financial advisor. Start by reading blogs, asking questions and informing yourself. Take the time to choose a financial advisor who will work with you to help you achieve your goals.
The Bottom Line on Retiring Comfortably & Without Debt
The reality is that people are living longer and are healthy and active longer than they used to be. This means that there is no longer a “typical retired person.” Some even choose to work at something they find personally satisfying and which supplements their income. Government pensions like CPP and OAS are no longer enough to fund a comfortable retirement, so with some careful planning one can avoid arriving at the unenviable circumstance of having to work during their golden years.