Did you know that 36% of Canadians worry they won’t be able to retire?
According to research by the Bank Of Montreal, 36% of Canadians believe they won’t reach the $1.7 million net worth they believe they need to retire.
It’s a shocking statistic, but then again, when you think you need $1.7 million to retire, it’s not all that crazy to be pessimistic. The average salary in Canada doesn’t come anywhere close to supplying $1.7 million over the course of a 30-year career, after subtracting living costs.
In this article, I’ll explore how to know whether you’re on track for a wealthy retirement, and how to start investing to make that happen.
How to know whether you’re on track to retire
Knowing whether you are on track to retire comfortably in Canada requires that you make two estimates:
It’s pretty hard to estimate these figures. However, the starting points would be the following:
- A defined benefit (DB) employer-sponsored pension. If you have one of these, your payout amount will be fixed on the date you retire. It’s usually fixed as a percentage of your highest-earning year. So, if you earn $50,000 per year now, your salary goes up 2% per year, you plan to work for 10 more years, and your DB pension percentage is 70%, your pension amount will likely be ($50,000 * (1.02^10))(0.7) = $42,664. Note that DB pensions are usually paid by the government. If you don’t work for the government or a highly regulated industry, you almost certainly aren’t part of a DB pension program.
- CPP. CPP benefits are calculated based on a percentage of your earnings, up to a set maximum, as well as your years in the workforce. CPP, unlike DB pension plans, is inflation-indexed. You have some control over how much CPP you earn: the longer you keep working, the higher your eventual CPP payout. The latest you can start drawing CPP is age 70.
- Income from assets. This includes your investment portfolio, real estate, businesses you own that can run independently of you, and so on. Much like CPP such income is hard to predict years in advance.
- Your living costs. All your current living costs adjusted for the inflation expected to your retirement date.
Subtract the final item from the above list from the prior three. If the resulting figure is positive, then you’ll be able to finance your retirement.
Investing for retirement
If you’re concerned about not being able to retire on time, investing is one of the best things you can do to give yourself a chance at success. Equity investments like stocks provide regular cash income, and if you hold them in a diversified package, you take relatively little risk in order to obtain that income.
Consider the Vanguard FTSE Canada High Dividend Yield ETF (TSX: VDY). It’s a Canadian dividend fund built on the FTSE High Yield Canada Index, an index of 58 high yield stocks. VDY holds all 58 of those stocks, along with some cash, meaning that it tracks its index very well. The fund has a 3.1% dividend yield and a 0.22% management expense ratio (MER). So, VDY can provide you with plenty of income at little cost. A diversified portfolio of such funds could go a long way toward paying your way in retirement.
