Concerns regarding the ability to retire comfortably after age 65

[StatGuy2000]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

 

[BWV]

The sobering fact is that a 65 year old male has a 22 year life expectancy. The max SS benefit beginning at age 66 is $34K annually. Subtract that from what you spend now and multiply by 25, that is about how much money you need in today's dollars. So if you plan to live off $70K per year, you need at least $900K in today's purchasing power when you turn 65. Most people cannot save this much therefore will either be impoverished in old age or have to work well into their 70s.

 

[Vanadium 50]

StatGuy2000 is Canadian. I don't think he gets SS.

StatGuy, the good news is you have 25 years to work at this. If you assume 5% per year growth (which is conservative), $21,000 per year savings equates to $1M at retirement age. The rule of thumb is that you can withdraw 4% of this per year. So, to a very good approximation, every dollar you save now - per month - equates to two dollars - per month - you can spend in retirement.

Can you budget for that?

 

[BWV]

Ok but 5% real - net of inflation - is not an overly conservative return assumption. Real yields are around zero in both the US and CAN

 

[Klystron]

There are general guidelines that may or may not apply to Statguy. When I moved back to this valley, mainly to help dependents, a wise old veteran cautioned me against common traps that dissipate finances faster than you realize.

1. Gambling, called 'gaming' here, including the stock market and real estate speculation.
2. Scams. This area attracts miscreants and thieves in droves, not to say the Internet.
3. Sex. Dating is an Industry here. Obtaining the objects of your desire is limited only by your funds and discretion. Even honest dating can deplete resources faster than all the above.
4. Entertainment including drugs, alcohol, legal cannabis, expensive hobbies, fast cars, etc.

What is left for the frugal? Friendship, family, work, volunteering, free libraries, exercise, affordable hobbies, and "the life of the mind"; i.e., science and math. Minimalism can be a lifestyle choice.

 

[Vanadium 50]

Ok but 5% real - net of inflation - is not an overly conservative return assumption. Real yields are around zero in both the US and CAN

There are a couple of ways I can address this. One is that inflation doesn't change the calculation I posted at all. It does, however, change the amount one needs in retirement. Maybe $1M isn't enough. Maybe you need $1.5M.

The other is to look at my own 20-year history. My assets collectively have been growing at 8.03% over the last twenty years. In that time, inflation has been 2.2%, so I have done 5.8% above inflation. And I'm no Warren Buffet. The difference between 5.0% and 5.8% over 25 years is 12%.

 

[BWV]

There are a couple of ways I can address this. One is that inflation doesn't change the calculation I posted at all. It does, however, change the amount one needs in retirement. Maybe $1M isn't enough. Maybe you need $1.5M.

The other is to look at my own 20-year history. My assets collectively have been growing at 8.03% over the last twenty years. In that time, inflation has been 2.2%, so I have done 5.8% above inflation. And I'm no Warren Buffet. The difference between 5.0% and 5.8% over 25 years is 12%.

easiest to think in real returns and constant dollars. Long Term (1900-present) real returns on US stocks are 6.5% and about 2.0% for government bonds. However current real interest rates are about zero. The annualized real S&P 500 return over the last 20 years is 3.6% (https://dqydj.com/sp-500-return-calculator/)

 

[Vanadium 50]

The annualized real S&P 500 return over the last 20 years is 3.6%

With dividends reinvested it's 5.9%. Not too far from the putative 5%. Not as good as my observed 8%, so maybe I am another Warren Buffet.

 

[BWV]

With dividends reinvested it's 5.9%. Not too far from the putative 5%. Not as good as my observed 8%, so maybe I am another Warren Buffet.

Yes, and with dividends re-invested, adjusted for inflation its 3.6%

 

[StatGuy2000]

StatGuy2000 is Canadian. I don't think he gets SS.

StatGuy, the good news is you have 25 years to work at this. If you assume 5% per year growth (which is conservative), $21,000 per year savings equates to $1M at retirement age. The rule of thumb is that you can withdraw 4% of this per year. So, to a very good approximation, every dollar you save now - per month - equates to two dollars - per month - you can spend in retirement.

Can you budget for that?

$21000 per year equates to $1750 per month savings, which is doable, although I still have some debt that I need to pay off beforehand.

Oh and for the record, we in Canada have what is called the Canada Pension Plan (CPP), which is roughly equivalent to Social Security in the US. (I am also in fact a dual Canadian/American citizen, but as I work in Canada, I don't pay into Social Security).

 

[StatGuy2000]

There are general guidelines that may or may not apply to Statguy. When I moved back to this valley, mainly to help dependents, a wise old veteran cautioned me against common traps that dissipate finances faster than you realize.

1. Gambling, called 'gaming' here, including the stock market and real estate speculation.
2. Scams. This area attracts miscreants and thieves in droves, not to say the Internet.
3. Sex. Dating is an Industry here. Obtaining the objects of your desire is limited only by your funds and discretion. Even honest dating can deplete resources faster than all the above.
4. Entertainment including drugs, alcohol, legal cannabis, expensive hobbies, fast cars, etc.

What is left for the frugal? Friendship, family, work, volunteering, free libraries, exercise, affordable hobbies, and "the life of the mind"; i.e., science and math. Minimalism can be a lifestyle choice.

1. As for me, I don't gamble, and my (past and future) investments in the stock market have been, and will continue to be, quite conservative.

2. I'm sufficiently skeptical to be wary of scams.

3. As for sex, I am single, but in a relationship. As for as I can tell, this relationship doesn't cost me too much money.

4. I don't drink or use drugs, and my hobbies are quite inexpensive (hiking/walking, reading, surfing the Internet, very much the "life of the mind" activities). And I don't own a car (not uncommon in Toronto, especially given the traffic).

 

[StatGuy2000]

The sobering fact is that a 65 year old male has a 22 year life expectancy. The max SS benefit beginning at age 66 is $34K annually. Subtract that from what you spend now and multiply by 25, that is about how much money you need in today's dollars. So if you plan to live off $70K per year, you need at least $900K in today's purchasing power when you turn 65. Most people cannot save this much therefore will either be impoverished in old age or have to work well into their 70s.

When I talk about retiring at 65, please note that I personally don't actually believe that I will actually retire at 65. I am someone that loves working, and so long as I'm healthy, I personally would be happy to keep working well into my 70s.

That being said, I want to be in a position to at least be able to retire at 65 in relative comfort if I chose. And by relative comfort, I mean not to live in extravagance, but to be able to have a roof over my head, feed myself well, and live a healthy lifestyle, not unlike how my late aunt lived.

 

[Vanadium 50]

Essentially, you have the information you need. Figure out what your cost of living will be, subtract off what CPP will give you, and escalate for inflation. Call that x. You need ~25x to retire without a risk of outliving your money. Using the 5% number that everyone hates (and I suspect that the nature of PF would be to complain about any example number), or some other number you like better, and you can work out what you need to save per month.

I suspect you will find the number doable but not very nice. Basically, you have as many years in retirement as you will have years to save for it. That means savings needs to become a significant fraction of your income. It won't be 10%.

 

[George Jones]

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

I got married when I was 43. My wife and I had our daughter (only child) when I was 46, when our combined net worth was less than $50000, and when I was on a 9-month contact and my wife was unemployed. That was quite scary.

By living frugally in the 13 years since our daughter was born, our situation has changed from "quite scary" to "somewhat scary".

When I talk about retiring at 65, please note that I personally don't actually believe that I will actually retire at 65. I am someone that loves working, and so long as I'm healthy, I personally would be happy to keep working well into my 70s.

For someone who retires now, this would make a difference to CPP (but not OAS), but it is impossible to predict the situation 20+ years from now.

From
https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

"Taking your pension after age 65

If you take your pension late, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it up to age 70 (8.4% per year).

This means that, an individual who starts receiving their retirement pension at the age of 70 will receive 42% more than if they had taken it at 65."

One can draw CPP for a smaller number of years, but at a larger rate.

 

[StatGuy2000]

To everyone:

I did a quick check of my finances.

I can most plausibly save around $1500-2000 per month. If I then save for the next 25 years, I would end up saving around $450000-$600000 (this is without factoring any interest I would be earning).

 

[gmax137]

that's 300 months. if you can get 5% annual interest your total nearly doubles.

 

[BWV]

But 5% interest does not exist these days

 

[Vanadium 50]

I can most plausibly save around $1500-2000 per month.

Pay yourself, or at least future you, first.

 

[StatGuy2000]

But 5% interest does not exist these days

So what would you suggest instead? Keep in mind that I can plausibly save $1500-2000 per month.

 

[BWV]

A broad, globally diversified low cost stock index fund is the best option for most people with a longer time horizon

 

[jtbell]

And I don't own a car (not uncommon in Toronto, especially given the traffic).

I hear the Toronto area is rather expensive (along with Vancouver and probably Montreal). You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary. Here in the US, it's not unusual for people to move from California and the Northeast to cheaper parts of the country after they retire.

You'd probably need a car if you're not in a big city, but it's possible to keep the cost down. My wife and I drive small cars and keep them a long time (at least 10 years each). Our basic cost is probably about $2,500 to $3,000 per year per car, plus the cost of long road trips (gasoline and extra maintenance).

 

[Vanadium 50]

But 5% interest does not exist these days

So what would you suggest instead?

As mentioned, my pre-inflation 20-year track record is just over 8%. Twenty years ago, inflation was 2.2% and 10-year US Treasuries were 4.7% so 5% interest didn't really exist either then. And yet... here I am.

I don't think BWV's complaint should change your behavior today one iota.

You need money in the future. The way to get it is to save it today. Save it where? Wherever the right risk-reward point is for you. Note that 5% - or 8% - never factors into this. It will factor into how much you will have at retirement, but it doesn't alter where you will put it today, or how much to put in today (as much as you can).

As to where to put it, I can't provide financial advice. Many vendors sell so-called "Target date funds" which are an attempt at a one-size fits all solution. For someone looking at a 2040 retirement, most are 10-20% bonds and 90-80% stocks. There is another axis: foreign vs. domestic. In your case, I think it's more complicated, and would probably want to think of three categories: domestic, US and other international. But a 2040 Target Date Fund might be a good starting place to get ideas.

Before I bought a fund, though, I'd start by buying a book or three.

 

[StatGuy2000]

I hear the Toronto area is rather expensive (along with Vancouver and probably Montreal). You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary. Here in the US, it's not unusual for people to move from California and the Northeast to cheaper parts of the country after they retire.

You'd probably need a car if you're not in a big city, but it's possible to keep the cost down. My wife and I drive small cars and keep them a long time (at least 10 years each). Our basic cost is probably about $2,500 to $3,000 per year per car, plus the cost of long road trips (gasoline and extra maintenance).

The most expensive aspect of living in the Toronto area and Vancouver involves the cost of rent (for those who rent), as well as property taxes for those who own their own homes (comparably to living in, say, New York City or San Francisco in the US).

Montreal is actually considerably cheaper to live in Canada -- I often see home prices and rents that can be anywhere from 25% to 50% less expensive than comparable homes in Toronto (the province of Quebec does have higher income taxes, although this wouldn't matter as much for retirees).

I have also thought about moving to less expensive locations elsewhere outside of Toronto when I retire as well, or even outside of North America entirely -- I have at times contemplated retiring to Malaysia or Thailand, for example.

 

[Vanadium 50]

You can probably reduce your cost of living considerably in retirement by moving to a smaller city or town if necessary.

The word "comfortably" is in the title. Regina? Too warm. How about Winnipeg? I know...Yellowknife! (and the wink is blue for a reason!)

 

[jtbell]

Or Calgary, where I was once caught in a blizzard in the middle of May.

 

[Vanadium 50]

but as I work in Canada, I don't pay into Social Security

You might discuss this with a professional. There is still time to pay in and get benefits upon retiring. Exactly how this is done depends on many things (including if and how you file US taxes), and whether it is financially advantageous is a key question. But it may not be impossible, and it may not be crazy.

 

[DaveC426913]

Hey @StatGuy2000 : fellow Canadian here. This topic has very recently become relevant to me, as my wife is retiring in a few years, and I, being younger than her, will retire few years after that.

So I have learned a new term from my Real Estate Agent: "cashing out".

Essentially, we are going to sell our investments, wipe out our debt, and buy a less expensive house in an area where housing prices are much lower.

 

[HankDorsett]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

income and debt are the two biggest issues regarding retirement. You really should see a retirement advisor to help you out. that being said I do have one bit of advice. You should transfer or pay off and then stop using any debt that cost you more then your investment rate of return.

 

[BWV]

You should transfer or pay off and then stop using any debt that cost you more then your investment rate of return.

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

 

[jtbell]

No one can borrow at a cheaper rate than they can safely invest.

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

 

[Klystron]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Correct. Also consider the almost-mandatory extended warranty and maintenance contract costs.

 

[Bystander]

probably

"Probably?" Emphatically.

 

[DaveC426913]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Which means the only difference between this and a standard interest loan is they've removed the option to pay it off early.

 

[Windadct]

Fidelity and Vanguard both have good online planning tools that allow you to set up hypothetical scenarios (risk, monthly contributions, retirement age - etc) and predict success against your retirement goals.
20 to 25 + years is a good time frame to get some good results - time is key. So do not delay, get moving.

 

[DaveC426913]

time is key. So do not delay, get moving.

Indeed.

In fact, you don't need to have a plan yet.
Start regular deposits or investments now. Even if it's 50 bucks a paycheque.

Don't wait until you know what you're going to do with it in the long run.
It'll be five years down the road and that'll be 10 grand you won't get when you retire.