Do You Really Need a $1.7 Million Nest Egg To Retire?

Kandice Martinez
July 28, 2023

Bursting the $1.7 Million Bubble

Hey there! Ready to explore the million-dollar question that’s bugging all Canadian retirees – do you really need to stockpile a $1.7 million fortune to retire comfortably? That’s a hefty sum, right? We’re here to put your mind at ease and debunk some retirement myths.

The Escalating Staircase: Savings Over Time

Imagine your financial life as an ascending staircase. Each step signifies an investment you made in your early 20s – oh, the magic of starting early! A recent BMO survey brought to light the fact that Canadians believe they need a mind-boggling $1.7 million to retire. However, does your golden years’ nest egg really need to be that golden?

Here’s the catch: inflation has bumped that estimated number up by 20% since 2020. But rest easy, this doesn’t mean you have to put aside an unrealistic $42,400 every year for 40 years into a Registered Retirement Savings Plan (RRSP). Let’s decipher these intimidating figures.

The Magic of Compounding Interest

Millennials and Gen Z, brace yourselves! Although the big numbers may seem intimidating, here’s a secret strategy: if you secure a 4% rate of return every year and annually add $17,000 to your RRSP for 40 years, you could be waving from that $1.7 million peak.

Where do we get that 4% return from?

Safe bets could be fixed income options like guaranteed investment certificates or Canadian dividend-paying stocks. It may appear cautious, but it’s a robust stepping stone.

Your Secret Weapon: Time

Time, your reliable ally, allows your money to multiply, even with a humble 4% annual investment return. Erin Allen, VP of Online ETF Distribution for BMO ETFs, simplifies this: at a 4% return, a $17,900 deposit at the end of each year could get you to the $1.7 million target in 40 years. This boils down to:

  • Your contributions: $716,000
  • Interest: A stunning $984,400

That’s the sheer power of compound interest for you!

Playing the Numbers Game

Wealth advisor Matthew Ardrey adds some intrigue to this retirement puzzle. He integrates elements like life expectancy, spending habits, and supplemental government benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS) payments into the equation. Plus, he introduces a stress test, the “Monte Carlo stress test”, to gauge the durability of your plan under less-than-perfect conditions.

Your Golden Number: It’s Personal

Bear in mind, the $1.7 million retirement goal isn’t a universal figure. It varies with personal circumstances.

Single individuals might find the climb steeper.

For long-term couples, each partner should aim for around $850,000.

If you’re blessed with a defined benefit (DB) pension plan, particularly an inflation-indexed one, your target might be significantly lower than $1.7 million. Also, having worked in Canada for a considerable duration entitles you to CPP and OAS benefits – think of these as mini DB pensions, every bit counts!

Canada’s esteemed retirement expert, Malcolm Hamilton, advises that debt-free couples with independent children could live comfortably on about 50% of their working income. CPP and OAS could cover most of a typical couple’s needs.

Location Matters

Living in the heart of Vancouver or Toronto? Unless you’re a homeowner, you might need to aim higher than $1.7 million. But for residents of Manitoba, Calgary, Montreal, or other cities, this figure may be an overshoot.

Wrap-up: Tailoring Your Retirement Plan

So, the big question: do you need $1.7 million to retire? It’s not black or white. It’s more of a ‘grab a coffee, evaluate your scenario, and strategize’ situation. After all, everyone’s journey into retirement is a unique adventure!