30 years from now...

This morning I was talking to a lady who was telling me why she used a walker. She had broken her neck, collar bone, and a tooth in November. She is 86. I said it was great that she was out and about, mobile and still able to volunteer for the MS society's Hope Campaign. She said she'd been volunteering for MS since 1966. That's a long time, I said. Well, I was in my 40s with three kids and needed something to do. And she's been doing it ever since.

This afternoon, I got to thinking: in 1979, this lady was 56. Let's say her and her husband planned to retire 10 years later (1989). 30 years later, how does that money look? Well, a 1979 dollar is now only worth 34 cents. In other words, something that cost $100 back in 1979, now costs $292. That's almost three times as much! Thanks to inflation (check out the inflation calculator), the value of a dollar decreases over time.

Here's the scary part. Let's say a 55-year-old couple today is hoping to retire in the next ten years. They've actually been contributing on and off to RRSPs since they were in their late 30s, ramped it up a bit in their late 40s, lost a chunk last year and now have $100k. They've decided to put in $10k/yr and hope to earn an average 5% over the next ten years. This'll make them about $300,000 by retirement (check out the compound interest calculator). If they plan on living until 95, they'll have about $17,000 per year to live off of (assuming the 5%). To have a combined income of $50,000 (today's dollars) to live off, this couple would need to save an additional $40,000/yr. The numbers don't get much better if the interest rate increases (which it probably will), they still fall short of having a livable income. On the up side, because their income is so low, they won't have any OAS clawbacks.

Assuming an average 2.5% inflation and 10% interest over the next 35 years, if you start now with $350/month (increase with inflation), you'll have just over $1million at retirement. This will fund a $40,000/yr income (indexed to inflation) at 8% return during retirement. If you want more than $40k/yr, you'll have to save more.

Shouldn't we all be trying to max out our RRSPs anyway? Yes! If you make $50,000/yr and max out your RRSP at that income ($9,000/yr), you'll have $2.4 million at retirement. Sound like too much? Not if you're hoping to have an annual draw of $50,000 at retirement...in 2044 dollars, that's almost $120,000 per year! And the illustration assumes an average 10% return...which is fine and dandy until an abnormal year like we just had.

Bottom line: have a plan and save what you can.