Retirement – Are You Saving Enough?

What do you want to be when you’re retired?  Where do you want to live?  What hobbies do you want to pursue?  Where do you want to travel?

Very few people under 50 are asking themselves these questions, but maybe they should.  Study after study indicates that Canadians are not saving enough for retirement, and by ignoring the inevitable they are seriously affecting their future lifestyle – literally trading off tomorrow for today – to the detriment of themselves.

Some interesting retirement research has been conducted recently in the U.S. that may provide some insights as to why retirement savings aren’t matching retirement needs.  Twenty-year olds get to meet avatars that are based on their own likeness – but aged 50 years older – in a digitally-created reality laboratory.  They speak to their aged likeness in a ‘mirror’ over a bathroom sink and are better able to imagine their future selves through this bizarre simulation.

After the experience, a series of questions are asked of them about retirement savings – and the findings are astonishing.  Compared to those who met a similarly-aged avatar of themselves, those who met their “future self” indicated they would save twice as much for retirement.

The implications are fascinating.  As human beings, we find it difficult to imagine ourselves in the future.  We generally believe that people ten years older than ourselves are still relatively young, but it’s a moving target.  [50 seems old to a 30-year old, but no so much to a 40-year old].  It’s hard to imagine our future selves say 30 years older, so we’re less likely to want to please that person than the person we are right now.

If you were given a 100% guarantee that you would be alive in 30 years and that your savings rate today would dictate the lifestyle of that person, what would you put away each month?  If that likelihood were 95% does that change your answer?  What about 85%?  With government hand-outs capping out at about $20,000 a year (Canada Pension Plan & Old Age Security), these scenarios aren’t just fictitious – they are our reality.

To prove it:

The life expectancy of a Canadian today is 82.1 years, behind only Japan (83.8), Switzerland, Italy, Australia and Sweden among developed countries.  The improvement in life expectancy is remarkable:

Fifteen percent of those currently aged 45 can expect to see their 100th birthday.  And the number only increases if you are younger:  thirty percent of those born this year are expected to be blowing out 100 candles in a century’s time.

As the UK’s Steve Webb (current Minister of pensions) puts it, “The dramatic speed at which life expectancy is changing means that we need to radically rethink our perceptions about our later lives.  We simply can’t look to our grandparents’ experience of retirement as a model for our own.  We will live longer and we will have to save more.”

Now imagine you have $10,000 burning a hole in your pocket.  You have a choice of either purchasing a brand new boat or investing it in your RRSP at 6%.

Most believe buying the boat would be the selfish thing to do.  It’s making a decision based on short term happiness, soon-to-be-created family memories, and pure enjoyment today.

Based on the above perspective, perhaps the most selfish thing you can do right now is invest it in your RRSP.  In 40 years, this $10,000 invested would be worth $70,400.  Discounted into today’s dollars (accounting for 2% inflation) it would be worth $31,883.  Wouldn’t you want to have this money available to enjoy or share later, maybe with your grandchildren?

It’s an interesting question, and for those tucking dollars away for retirement now, one could argue they are being selfish for their future self.  Those who aren’t, may find themselves regretting current decisions a few years down the road.

And what exactly is your target retirement number?  And how much do you need to save between now and then to achieve it?

Most people need a financial planner to help answer these questions.  The short answer is:  “It depends”.  It depends on such factors as your desired retirement lifestyle, your risk tolerance, your knowledge of investing, your timeline, and other investments held (inside and outside your RRSPs and Pension).  No one is the same, and one size does not fit all.

If you are looking to better understand your financial trajectory, if you would like a second opinion on your investments, or if you would like to talk with someone (who isn’t selling any financial products) about your retirement, please consider contacting me.

I’ve had more than one set of clients say “I wish we had come to see you 30 years ago.”  I can’t do anything about that, except to encourage those interested in learning more to take advantage of my free/no-obligation 45-minute Money Coaching meeting.  Your future self just might thank you.

Take control of your finances today.

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