Case Study: Savings & Investments

Saving Early is Important

It is never too early to start a savings program, for many purposes. Whether it is for buying a home, or buying a car or for travel, or for longer-term retirement, it is important to figure out how much is reasonable to save, for how long, and where to invest your savings. Using our calculators and resources can help you make the right decisions to maximize your savings. Take Jane's story as an example:

Saving for Short-term and Long-term.

Jane is single and 25. She knows that she should save for the future but finds the demands on her income make a regular savings plan difficult.

She has a job that pays her rent and enables her to eat out now and then and enjoy the company of friends, but she is not ready to settle down with a partner.

Jane figured it would be a good idea to set up a savings account at her bank and deposit $100 from each biweekly pay cheque. She hoped that by the time she reached 30 she could buy an apartment and not pay rent any more. Was this a reasonable assumption? If Jane had become a member of FAC and accessed our savings and investment calculator she would know whether this plan was a good one or not.

Jane also had long term savings goals. She wanted to ensure she had enough money for her retirement at 65 or 70. She decided to contribute $1,000 annually to her Registered Retirement Savings Plan (RRSP). This would generate a yearly refund on her taxes. She'll have income from the Canada Pension Plan and Old Age Security, and she was told by her financial advisor that her RRSP should grow to be enough for her to retire on. But if Jane had joined FAC for a fraction of the cost of talking to a financial advisor, she could have checked if that amount would be enough and if she was contributing enough every year to her RRSP. All she needed to do was run our MyPRIM calculator.

Fast forward to Age 65

Let's look at Jane's situation at age 65. Jane did manage to save from her paycheque and through annual deposits into her RRSP as she had planned. She married but did not have children and she and her husband, John, live in a nice apartment with the mortgage just paid off. John also wants to retire. He worked in the building trades with no pension but he did manage to save $100,000 in RRSPs.

Jane earns $60,000 per year and takes home $40,000 after taxes and payroll deductions, while John earns $75,000 and takes home $50,000 after taxes and paying government contributions. John and Jane live comfortably on more than $7,000 per month, particularly as there are no more mortgage payments.

Income During Retirement

John can expect to receive $3,000 a year from his RRSP, after tax. In addition John could receive up to $1,800 per month from the government. So, after paying taxes, he will get up to $18,000 each year, indexed to inflation.

Jane will also receive government pensions similar to John.

Jane did not have a pension so she has to rely on her personal savings.

After 40 years of contributing $1,000, Jane's RRSP will have accumulated to $125,000.

Her other savings were used to help buy their apartment after she got married.

Jane can draw down her RRSP each month and, based on prudent investment, she hopes to pay herself $500 per month before tax, which will work out to about $400 per month after tax.

Between John and Jane they can expect to receive after-tax income of $44,000 per year or $3,700 per month which is just under 50% of what they were being paid prior to their retirement.

This means John and Jane have to cut back their standard of living, or continue to work longer. If they both worked until age 70 for the same money, then their after-tax retirement income could increase to $6,000 per month reflecting increases in government pensions after age 65 and saving more while working the extra 5 years.

If Jane had checked our calculator when she was younger, she would have known that her RRSP savings would not have been enough to contribute to a good retirement income. Use this calculator to figure out if your own savings plans are going to be adequate for retirement. Link to the S & I calculator.

If Jane and John had also gained a better understanding of how prepared they were back in their 30s and 40s, by using our MyPRIM retirement readiness calculator, they could have made different decisions to ensure a better retirement income. You could be better prepared for your retirement if you use this calculator.

Summary

Neither Jane or John had employer-provided pensions, so, according to our calculators, to match their pre-retirement income in their later years, they would have had to accumulate $1.5 million in RRSPs. Their annual savings would have had to be not just $1,750 per year but close to $12,000 per year. Of course they may be able to live quite well on less than their pre-retirement income, but even being able to live on 50 percent of their pre-retirement income would have required annual savings of $6,000 each year.

And also investing in bank funds may not have been prudent considering the fees the banks charge on their clients' investments. Simply reinvesting their tax refunds from contributing to RRSP's could have generated an additional $100,000 by the time they retired.

It's important to have a definite strategy for saving while still being flexible enough to take into account lifestyle changes, such as getting married and buying an apartment. This strategy should also incorporate retirement plan to to avoid any surprises before it is too late to change. Our calculators and advice will help you be better prepared for all eventualities.