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.