Freedom 55 is Just a Dream
Most people my age have a distorted view of retirement. I’d bet if you surveyed people aged 25-34 that more than half of them truly believe they will be able to retire early. The reason why these views on retirement are often misguided is because it’s nearly impossible to determine what your life will be like 30 – 40 years into the future.
Why Freedom 55?
We’ve all seen the financial services commercials portraying the couples who have retired early and are living their dreams in exotic locations. Why wait until you reach the standard retirement age of 65 to stop working and enjoy life?
But is Freedom 55 even a reality for the majority of Canadians these days? Life expectancy is a lot higher than it used to be, so when people are planning on retiring when they’re 55 they still have another 30 years ahead of them. Investment returns are expected to be lower in the long term. No longer do we see projections of 12-15% returns. And the rising cost of housing is making home ownership a lot less affordable in terms of the down payment required and the monthly cost of living.
I don’t usually give much credence to retirement calculators since most of them are too rigid to handle the inevitable changes from year to year. But using some general assumptions let’s take a look at what it would take in order for a 30 year-old to comfortably retire at the age of 55:
Rate of return to retirement – 6%
Number of years to retirement – 25 years
Current value of investments – $50,000
Current investment contributions – $10,000 annually
Income required – $40,000 annually
Number of years the funds need to last – 30 years
Annual income required – $40,000
Projected savings needed at retirement – $1,200,000
Value of investments at retirement – $796,157
Shortfall of savings plan – (403,843)
As you can see, this individual will end up considerably short of their retirement goal, and I was fairly generous with the starting point. I don’t know very many 30 year-old’s with $50,000 in savings who can also manage to set aside $10,000 a year for retirement.
Retirement Reality Check
Young people who are just getting started in their careers and learning how to invest can often convince themselves that they are on the right path towards early retirement. They pull out the retirement calculator, manipulate some numbers here and there, and just like magic they have achieved the early retirement dream!
The reality is that many of us have yet to really struggle with balancing our savings and investments while raising a family. That’s why retirement is so difficult to plan in your 20’s or 30’s. Who really knows where we will be at financially even 10 years from now?
Let’s look at real life examples of some of the difficult financial choices that we all may face down the road:
- Save for a down payment on a house vs. Contribute to investment account
- Take a job that you love for less pay vs. Take a job you hate for more money
- Stay at home parent vs. two income household
- Contribute to RESP vs. Make an extra mortgage payment
- Take a family vacation vs. Take your family to the dentist
- Replace the roof vs. Buy a 2nd vehicle
- Put your child in hockey vs. pay off credit card
If you try and save too much in order to reach Freedom 55, you might miss out on other great experiences with your friends and family. If you wait too long and don’t save enough, you might still be working in your 70’s.
The point is, trying to determine your retirement date 25 years in advance is next to impossible. Young people are better off trying to continually improve their financial situation each year so that their choices become less difficult over time.
I really enjoy reading your blog, however I felt the need to comment on this most recent post. You have taken into account the future value of making the investments of $10,000 a year for 25 years, however you failed to take into account that the $800,000 in savings will also provide a return during retirement. If you calculate the present value of 30 payments of $40,000 using the same rate of investment of 6% you would only need $550,000 to make it work. The power of compound interest works on both sides of the retirement line.
Just thought I’d mention that saving $10,000 a year for 25 years will put you in good stead to retire at an early point.
Thanks for your comment Colin. You’re right about the investment return continuing on after retirement. As I mention in the article, most retirement calculators make very general assumptions due to lack of inputs, which is certainly the case here.
Most people don’t make the exact same contributions every single year until retirement. Saving $10k a year will definitely get you on the right track though.
Retiring early from what? If you enjoy what you do, why retire! My cousin who lives in Canada (Vancouver) is 82 years old and still works. He has his own company and he has reduced his hours, but he loves what does. Retirement would probably kill him.
That’s the other thing that’s difficult to plan for. What are you going to do for 30 years when you are retired?
I plan to be able to retire early if I want to, this does not mean that I will retire if I am having fun at my job. If you choose to retire early, yes you choose not to do other things. As it is said, you can anything not everything.
I think young people confuse retirement with financial freedom. Like you say, it is tough to visualize a life 20 to 30 years in the future when life is changing so quickly. I like the concept of setting 5 year financial goals for saving, debt management, expense control and managing your net worth. These are the things that will help you achieve financial freedom at any age regardless of when you want to retire! Thanks for the great topic!
Great advice Jim! Breaking down your financial goals into 5 year increments can definitely be easier to manage and keep you on the right path towards financial freedom.
You’re right. Life doesn’t play out like the retirement calculator. Expenses crop up and you need to make choices. I’m sure some people sold Google stocks a few years back to buy a new car.
As far as retirement goes, I think it’s better off to find something you really enjoy doing and continue working as long as you can. Part time employment is the retirement of the future.
@retirebyforty – well said.
@Robb – I like the premise of the post, good article. However, as much as I enjoy investing for tomorrow I have no clue what is going to happen tomorrow, let alone 30 years from now 🙂
Discussions of this sort never seem to take major stock market crashes into account. There seems to be one or two every decade. I’m having a hard time convincing myself to buy stocks or index funds to save for old age when it could easily lose half its value or more. And that could happen more than once! The world economy has not recovered, I believe there is much more drama ahead of us.
@Julie (I hope). Your fear is completely rational. The general answer is that what you do about it depends entirely on your situation (age, savings, dependants, etc…). At this moment in time (end of 2016), however, it is hard to imagine any reason to start putting money into equity and bond markets, in any form, for any reason. If you don’t know why I might be saying that, then you probably need to continue your education, and not just listen to a “trusted advisor”. If you do know why, and disagree anyway, then go ahead. There is a terrific bit of investment advice I learned in the 80’s. Read some of the work by its author if you need to continue your investing education. “I made my money by selling too soon”
In our planning with clients we go over the retirement income options that exist. As we see it there is three sources of income in retirement (not including keep working.
I think you also forgot that in retirement one could also be entitled to government benefits of CPP and OAS… I think the goal is less to set a definite date to retire, but has savings set aside taht allow you to have chocies. Maybe keep working if you chose, maybe start a new business, maybe see the world. Having set money aside diligently will allow you choices.
According to Russel Invetsments the average income in retirement is $35,200. That means CPP and OAS can make up over 50% (in total $18,300 if receiving maximum) and both of those benefits are indexed. As
In our planning with clients we go over the retirement income options that exist. As we see it there is three sources of income in retirement (not including keep working).
1) Government benefits (CPP/QPP & OAS)
2) Work pensions (Defined benefit or Defined Contributions)
3) Personal savings (RRSPs, TFSAs, etc)
I think the job of a good financial advisor is to look at the current cost of the clients lifestyle and help clients understand how much they need to save for their retirement based on their current lifestyle. I do not believe that lifestyle changes significantly in retirement. If you have lived your lifestyle for 50 years, I do not believe the next day lifestyle changes signifcantly (at least not for most).
Once you have a good idea of the lifestyle in retirement & how much entitlements are in 1) and 2) above, you’ll be able to determine roughly how much you need to have saved to support your lifestyle.
If we agree all canadians have 1) & many have 2).. the goal is indeed achievable. Our goals as financial advisors in to advise clients. Part of that role is helping clients understand ghow much money is required to support lifestyle in retirement and other (premature death, disability, etc) Ultimately the clients armed with the information can make their own decisions… without the information how can someone make a decisions with any confidence.
As far as market crashes and their impact on your overall situation… if you are years away from retirement they should have little impact.. if you are in retirement, they should also have little impact as your portfolio (I would hope) should have been manage to protect your savings from that… if it is not… you are getting poor advice.