How much money do you need to retire comfortably?
A recent BMO survey put the average Canadian answer at $1.7 million.
It is a memorable number. It may also be close to meaningless.
In a recent Globe and Mail column, I looked at why retirement planning becomes much more useful when you stop focusing on a single target portfolio value and start with something more practical: spending.
Two households can have very different retirement needs.
One may have a paid-off home, modest travel plans and meaningful income from the Canada Pension Plan, Old Age Security and a workplace pension.
Another may be renting, travelling frequently and relying almost entirely on personal savings.
Giving both households the same retirement savings target does not tell us very much.
Inflation creates another problem. A 25-year-old who thinks they will need $1.7 million at age 65 would need closer to $4.5 million in future dollars if inflation averaged 2.5 per cent.
That sounds intimidating until you remember that retirement planning is not really about accumulating one giant pile of money and then slowly spending it down.
Your investments can continue growing throughout retirement.
A proper plan looks at expected spending, government benefits, pensions, housing, retirement age, longevity, inflation, investment returns and how those variables interact over time.
It also lets you test different scenarios.
What happens if you retire three years later? Spend less in the first few years? Travel more? Receive a smaller pension than expected? Live longer than expected?
Those questions are far more useful than asking whether you have reached an arbitrary savings milestone.
Retirement planning becomes less overwhelming when you stop treating retirement as a single number you need to hit.
The better question is whether your future income and assets can support the life you actually want to live.
Preet Banerjee
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