I really got interested in finances when I was about 45 years old. I realized that there were not that many “Earning years” ahead of me. So, I looked at my financial situation with a view to retiring. It was not a pretty site. $50,000.00 in your RRSP is just not going to cut it. The money that you get from Old Age Security, and Canada pension, might be enough to buy food. (at pre Covid prices) but little else. Most people today, especially those under 45, have no company pension either.
Now comes the big question, so what are you going to do? The most common responses are; “work till I die” or “hopefully win a lottery.” Your luck at lotteries better be way better than mine. I would be way better off putting the money I spend on lotteries into the stock market. The payoff is way better. Working till you die, is not something most people WANT to do.
Unfortunately, this is the situation for too many Canadians. By the way, if your reading this, and you are younger than 45, you still need to keep reading. If you have been following me, then you know that as far as I am concerned there are only 3 ways to become financially independent available to ordinary people. Own your own business, Real Estate assets, and Paper assets.
When you retire, you need to have basically the same amount of money coming in every month that you are getting from your job today. Yes, your expenses should be less, but you will have more time, so there will be new expenses. There are 2 ways of doing that. You can have a very large sum of money someplace, that you can draw down. Or you have the type of assets that generate the amount of money that you need every month.
Example time. Your take home pay that you live on today is $4000.00 a month. If you retire at 65, your CPP or Canada Pension Plan income will be in the range of $800.00 to $1200.00 depending on how much, and how long, you contributed. (It could me more or it could be less) For this example we will use $1000.00. (keeps the math simple)
You need $4000 a month. You get $1000.00 from CPP. That means you need to replace $3000.00 a month from some other source. That $3,000.00 can come out of your RRSP. That means that you will be withdrawing $3,000.00 a month (36,000.00 per year) from your RRSP. But wait a minute, you have to pay tax on your RRSP withdrawals. (Why a TFSA is so much better) If we assume a 30% tax rate (this will vary on many things. Talk to a tax account long before you need to withdraw for best advice.) you will need to take out about $3,900.00 a month. ($46,800 a year) If you are lucky enough to have $500,000.00 in your RRSP at 65, then you can withdraw for about 11 years before you drain the account. That means you are out of money by 76 years old.
I know, I know, it is not that bad. The investments in your RRSP should be making you money every year, which will add back into the RRSP investment amount each year. Let us look at how much your investment has to make each year. $46,800 is 9.4% of $500,000.00, the value of your investment. That means that your investments have to make at least 9.4% each year to maintain the balance. If that happens you will probably not run out of money.
If your investments make less, then the balance each year will decrease. That is why it is so important to know what the return on your investments are. If you are only making 2% and you need 9% the money runs out much faster. Everybody, no matter how small the investment NEEDS TO KNOW THEIR RETURN. Your financial adviser can answer this question easily, and you better ask each year. We didn’t account for inflation which would make this even more complicated.
Now your saying, “But I have no where near $500,000.00 in an RRSP. And I can’t afford to put enough money into my RRSP to get to $500,000.00.” “What can I do??”
No bull, if you are in this situation, get ready to do some work and some learning. Starting now. It gets exponentially harder every year you wait. If you are under 30, you have a huge advantage. You have time on your side. DON’T WASTE IT!!!
For example. At 45 you have $50,000.00 in your RRSP. You add $1000.00 a year and get 6% return. At age 65 your investment is worth about $197,142.00. If you are 30 with the same $50,000.00, and the same return, and yearly contribution, at age 65 your investment is worth $495,735.00. More than double what you get at age 45.
What else can you do? Personally, I started learning and investing in the stock market. I took the profits from that and invested in Real Estate assets, I also invest in my website. Real Estate, done right, can give you the biggest returns possible. You might get lucky and get a stock that goes up 500% (PYR as an example), but there is far more luck involved in that, than finding a good deal in Real Estate, and making 50% – 150% return. The other beauty of real estate is that it can generate monthly income. (Passive income) This can be in the form of rents, mortgage payments, etc. Paper assets can do the same. I am a big fan of Canadian Stocks that pay a monthly dividend. Generating $500.00 a month in dividends does require that large of an investment. (Whats in your RRSP/TFSA??) Starting a business can also generate Passive income from Dividends and also generate Employment income.
Example time. At age 45, you can take your $50,000.00 and buy a small apartment unit. You own it for 20 years while the tenants pay off the mortgage and pay for improvements and upgrades. At 65 you sell the property and hold the $400,000.00 mortgage, at 8% (the low end of private money today) That generates a monthly income of $3065.00. That money will come in for the next 20 -25 years depending on the term. There is the monthly money that replaces your employment income. This also allows any investments that you have in an RRSP or TFSA, to remain untouched.
If your ambitious, you can do all three. It does require some time and energy, but often, you can do this while still having a full time job. There is never a guarantee, except that if you don’t do anything, you’ll work till you die.
There are people out there who can help and mentor you. But you do at least have to reach out to them.
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