Yes, You Can Save Too Much Money
Though you need to save a good chunk each month to retire one day, I think most people can achieve the savings target. And then some.
Good Friday morning friends!
Thanks to a friendly share or two, there are a swath of new friends onboard this morning! Thanks for jumping on the train — hopefully, as time goes on, you'll find your finances to be a little less stressful than they once were.
Really quickly: Last week (GameStop, AMC, et.al.) — It's amazing to see just how quickly this entire story seems to have turned around. One minute, you're hearing about all the stories of big-time Reddit traders and their million-dollar gains. And the next, they're showcasing the million they lost in the last four days.
It's neat. It's heartbreaking. And in many ways, it's kind of terrifying. I myself jumped in on AMC with the smallest investment I've ever made. There was a point, I figured, where the downside of losing $150 just didn't match the chance at making 1,000% by the end of the week. Am I bummed? Meh, sure, I guess.
But there's a certain element of being able to say I was part of the story that's kind of neat as well. To an extent, that alone may have been worth the $150.
This week though, we're jumping back into our discussion from the rest of January — namely, how you should be putting a budget and a personal net worth statement together to bring better focus to your financial goals for the year.
If you worked through your budget and your personal net worth statement in tandem, I'm willing to bet you discovered more areas of "income" than you originally thought you had.
With that in mind, I'll make the assertion: You can, indeed, save too much money during your working years.
Let me explain.
You Need to Save At Least $750 Per Month. Now.
It's difficult to sit in an armchair and tell you exactly how much you'll need in retirement. General rules of thumb are to have between 60% and 80% of your pre-retirement income saved up for retirement.
But there are so many assumptions built into this rule of thumb!
It assumes you'll live to 90 years of age. It assumes you don't want to provide an inheritance to your children. It assumes you'll want the same amount of income every year between the ages of 65 and 90 (even though you'll likely want more money in those first few years of retirement). It assumes a very specific interest rate. It assumes we all live in the same location with the same costs.
Long story short, nailing down a number for retirement is difficult. So I'm putting my sword in the ground on one number: $750 per month is the minimum a couple should save to have a retirement.
Here are my numbers:
You'll work for 30 years
You'll achieve a 6% rate of return on your investments in your working years
You'll achieve a 3% rate of return on your investments in your retirement years
You'll be retired for 25 years
You'll have some sort of social retirement plan (in Canada, think Canada Pension Plan (CPP) and Old Age Security (OAS))
Using these numbers, you'll be able to amass investments of about $753,000 during your working years and you'll be able to pull out $43,000 a year from that until your passing at age 90. Add on about $25,000 of CPP and OAS payments for both you and your spouse (or any other amount dependent on where you live) and you're looking at a pre-tax retirement income of $68,000. You'll have to pay tax on that number, sure, but this is a very efficient type of income that can be split between spouses and yields a surprisingly low marginal tax rate.
Is $68,000 a luxurious retirement? Probably not. Is $68,000 enough to avoid having to work until you're 75 years old? Quite likely.
$750 a month is my stake in the ground.
If at all possible, I recommend saving and growing your net worth more than that number each month. Something as simple as working 2 extra years and saving $50 more ($800 total) yields an investment total of $926,00 and an annual income of $81,000! That's a huge difference for 2 extra years of work and an extra $50 a month. (We are living longer than ever before, after all.)
$750 a Month Is Less Than You Think It Is
Now, if you head back a couple weeks and scour the Toonie archives, you'll note I've talked about what I deem to be "income". "Income", to my way of thinking, is anything that increases your personal net worth. This is a bit of a liberal, free-wheeling definition, but hear me out.
There are numerous ways for your portfolio to grow over 30 years and achieve the $750 (or more) per month savings plan. Here are a few ideas, off the top of my head:
If you own your home, it generally appreciates between 5% and 7% per year. A $250,000 home, therefore, would appreciate around $15,000 per year, resulting in a monthly growth of $1,250.
Pension plans will return an average rate of return of 5% or more over your working life. Plus, you'll likely be the benefactor of an employer contribution to that pension plan as well, doubling your return from the start. If you contribute $150 a paycheque to your pension, your employer matches it. If you have 2 paycheques per month, that's $600 per month right there.
Though RESP contributions are designed for your child's post-secondary education, the 20% government grant will dramatically ease the burden of educational saving. But easing this burden, you can have more cash for other savings and investments. The government kicks in 20% up to $500 ($2,500 of contributions) in a year.
Stock market investments, of course, grow on average between 6% and 10% per year. (The TSX in Canada averaged 9.3% annual returns from 1960 to 2018). This growth, plus dividends, should also be considered when measuring your net worth growth.
There are numerous other ways to achieve the $750 per month savings amount. Rental properties, business investments, or collecting appreciative artwork could all work.
I think, if you put your personal net worth down right now and determine which assets you own actually grow on a yearly basis, it'll be easy to see that $750 per month number quickly become a reasonable target.
Be Aware: You Can Save Too Much
Brought full circle, the crux of my argument is this: If you have a range of savings plans, investments, deferred income, or pension plans in your household, perhaps you can lay off of the saving train a little and provide yourself some slack in your everyday life.
It's totally a first-world problem to have, but you can sit down at the table, analyze your net worth, and come to the conclusion that you have more assets than you'll need in your retirement years. Or you may realize your current savings rate will result in a larger portfolio than you expected (or need and want).
There are situations where I think it's quite wise to lay off the savings and investments and use the cash to operate your daily life instead.
I've seen situations where folks pass away and hand off millions to their children, while living through their working years and retirement years as though they had nothing.
Life can be easier than struggling through each day because you insist on saving every extra penny.
Sit down, analyze your personal net worth, set goals for where you want to be at the end of the year, at the end of the next 5 years, and at the end of the next 15 years, and use an onlinecalculator to help you determine how much you need to grow your net worth each year to achieve your goals.
Perhaps you're on the right path already. If so, take a breath and relax your everyday life a little.
If you're not on the right path, know it doesn't take too many alterations to meet your future goals.
Thanks for making it this far. I hope everyone has a fantastic week ahead and is a little less focused on the ups and downs of stock market charts.
JG