Early retirement has always been my biggest financial goal. I talk about it all the time on this blog: I want to retire by the time I’m in my mid 50’s. But what does “retire” actually mean?
My dad retired this year at age 65. He had wanted to retire earlier, but since he didn’t have a pension with the company he worked for, he had to wait and save. As for my mom, she’s got a nice government pension waiting for her when she retires – likely while she’s still in her 50’s. She worked at the government for almost her entire career, and as I look back at the first 8 years of my career, I haven’t had that kind of stability at all. And without a company pension to look forward to in 25 years, the cost of early retirement stresses me out a bit.
When I do my retirement calculations, I don’t include CPP or OAS payments, because I’m not sure I can rely on that money being there for me 35 years from now. But that being said, the average combined annual payout from CPP and OAS is currently $12,528 and the maximum annual payout is $18,372. So if that money is still there when I retire, it will be a significant amount of cash coming in that I haven’t been planning for. Wouldn’t that be nice?
So when I think about retirement, what does that actually look like for me? Retirement to me means having the freedom to do whatever I want to do, without the obligation to work for a living. I guess you could call it financial independence, rather than retirement. I know myself pretty well, and I know that I likely won’t stop working completely when I retire. But I’d like that option, if that’s what I want to do. Maybe some people wouldn’t consider that actually retiring. But retirement can mean different things to different people. Maybe I’ll volunteer. Maybe I’ll travel (I’ll definitely travel). Maybe I’ll become a landlord, or work part-time in a coffee shop, or maybe I’ll still be earning an income through this blog. Who knows what I’ll be up to! But whatever it is, it’ll be my choice, and it won’t be based on the need to bring in an income. Freedom.
I’m 31 right now. I’ve always envisioned retiring back in my hometown, with a small home by the ocean. But, a lot can happen in the next 25 years, and I don’t subscribe to the idea of necessarily needing retirement to look a certain way. I may have this exact lifestyle for the rest of my life, or maybe marriage and kids are in my future. Maybe my retirement will look completely different than what I’m thinking of. So while I have very little financial obligation right now in my life, it only makes sense to try and save as much as possible in case I’m not able to later on in life. Kids are expensive. Emergencies will happen. Big travel plans will appear. Health will deteriorate. I want to work hard now while I’m young(ish) and able-bodied, because when I’m older I know I’d rather be doing anything instead of working for a pay cheque and worrying about money. :)
I’ve been giving a lot of thought to my 2014 goals, and since early retirement is still a priority for me, you’ll see that reflected in what I have planned for next year.
What does retirement mean to you? At what age are you looking to retire?
Ever since I discovered NetworthIQ, I’ve religiously tracked my numbers every month. Sometimes I’ll browse through the profiles to see how others are doing, but mostly I keep track of my numbers for myself and for this blog. From the time I started up until today (8 years), my net worth has increased by over $110,000 (an average of approx. $14,000/year).
Now, that’s pretty good considering I have never been a high income earner. Before this year, my average gross annual salary (not including freelance/side income) for the last 8 years was around $45,000. And even when you factor in the freelance/side income, my average gross annual salary only increases to $53,000. 2011 was my best year when I earned just over $82,000. This year, I’ll hover between $75-80,000 when you add up my salary with my freelance income. That’s a comfortable amount to live on… but it’s not life changing.
My net worth hasn’t increased enough for me to feel satisfied, and that’s mainly due to my retirement savings. In 2011, I had a consultation with a fee-only financial advisor (provided by the Toronto Star), who informed me that if I want to retire by my goal age of 55-57, I need to be saving a lot more aggressively than I have been. Unfortunately last year, I barely saved anything, and this year it’s been a struggle to get back on track. I’m earning less money than I did in 2011, so is early retirement still my number one goal? If so, then every other financial decision I make needs to reflect that fact. And if it isn’t my number one goal anymore, then what is?
This is what I need to figure out before I start tackling what I want to achieve for next year. I see next year as a pivot point to my finances (and my life). I’m finally settled down in Vancouver. I have a home and a steady job, and at my advancing age (yep, I said it) I don’t see myself dropping everything and moving abroad again or doing anything drastic anytime soon. Travel will always be a big part of my life, but I’ve already acknowledged the fact that I need to scale back. Even this year (where I was supposed to really slow down) was a bit excessive.
Right now I’m saving 10% of my gross annual income for retirement. It’s not enough. Based on my calculations, I need to be saving 18-20% of my gross if I want to hit my early age goal (without counting on CPP, OAS, or property). Since that doesn’t include other savings goals, this will mean making significant lifestyle changes, or increasing my income somehow. Likely both.
A lot to ponder over the next few weeks, that’s for sure.
Have you started thinking about your goals for next year?
From graduating University, leaving home, finding a partner, having kids, to becoming financially independent, we 20-somethings seem to be doing everything a little later in life than the previous generation. So it makes sense that retirement might also happen later as well.
By the time my mom was 29, she was married with 2 kids – and a homeowner by age 24. Meanwhile at age 29, I feel like I can barely take care of myself. :|
Even though retirement might seem a long ways off, 20-somethings are in the best position to begin saving for retirement. The more money you can save today, means the more money you will have in the future. Yet, it seems like very few of us are putting enough money into our RRSPs, or even thinking about retirement at all.
Retirement as we know it today is based on the idea that you work for the majority of your life, until you have accumulated enough money to quit your job and live off of your savings – typically in your mid-60’s. But what will retirement look like in 30-40 years when we’re ready to retire? And will the traditional method of saving our income until our 60’s lead to a comfortable retirement – or will we fall short?
Here are some reasons why 20-somethings might face difficulties staying on track with a retirement plan:
More debt upon graduation
According to the Canadian Council on Learning, the average tuition for a university undergraduate in 1990 was $1,464. But by 2010, that number had more than tripled to an average of $4,917. As a result of the increase in tuition, graduates who completed their programs in 2000 owed 68 per cent more than students who graduated in 1990.
The average debt load of university graduates in 2009 was $26,680 – which doesn’t include credit cards, lines of credit, car loans, or mortgages. And with a shortage of job opportunities for new graduates, it is easy to see why it can be hard for 20-somethings to begin their journey towards financial independence.
Higher cost of living
In most of Canada’s major cities, the age-old principle of purchasing a home no more than 2-3x your gross annual salary is not realistic. A January 2011 study done by the Frontier Centre for Public Policy showed that the median Vancouver home at $602,000 was 9.5 times the $63,100 median household income in the city. Meanwhile, the median Toronto home at $379,000 was sitting at 5.1 times the $74,800 median household income.
It’s not just housing that’s more expensive in comparison. It’s everything from the cost of fuel, to movie tickets, to groceries and clothing.
Not only do students have more debt upon graduation, and a higher cost of living, there are also other expenses that other generations didn’t have – such as cell phones, personal computers and internet access – all of which is considered essential in order to be competitive in today’s job market.
Less employers offering pensions & benefits
Many companies have stopped offering traditional pensions or medical benefits to new hires, or have significantly cut back on the plans that they offer. Since I entered the workforce six years ago, I have only worked for one company that offered an RRSP plan with a company match (four per cent).
I have also been employed by companies that don’t offer a health benefits plan at all. Which means that everything from a visit to the dentist, to getting a prescription filled came out of my pocket.
Previous to 1992, the opportunity to borrow money penalty-free from your RRSPs was not an option. With the introduction of the Home Buyers’ Plan in 1992, an estimated two million people have borrowed more than $15 billion of their own RRSP savings to purchase a home.
The Lifelong Learning Plan, which was introduced in 1999, has seen an estimated 50,000 people borrow approximately $363 million since its inception.
While these programs are “penalty-free” as long as you repay the money back into RRSPs within 15 years, borrowers will end up losing tens of thousands of dollars in potential tax-deferred growth if they take the entire 15 year period.
More opportunities & accessibility
The world is much more accessible than it once was. Many young adults are finding opportunities abroad that just weren’t widely available 10 or 20 years ago, such as teaching English abroad, volunteering in third-world countries, or spending a year traveling. These opportunities tend to mean that 20-somethings will take that much longer graduating from university, getting into the work force, and finding their way out of debt.
Travel and exploration aside, 20 years ago, there weren’t iPads, smart phones, flat screen TVs, video game consoles, or DVD movies to buy – not that you need to buy any of those items, but they are there. What’s more, with the internet, we don’t even need to leave the comfort of our own home to buy anything. Late at night, or on a rainy day, with a click of a mouse, we can buy whatever we want – which does nothing to curb impulse shopping.
Longer life expectancy
It’s no surprise that we are living longer than ever. In 1970, the average life expectancy of a person Canada was 72.7 years. In 2009, that number jumped to 81.2 years on average. While that might not seem like a lot, it means a lot more savings is needed in order to finance almost 10 more years of life expectancy. And of course, those are just averages. There is a significant possibility that the 20-somethings of today will live well into their 90’s and beyond.
Do you think the retirement at 65 is out of reach for today’s 20-somethings?