We frequently hear that Canadians are unsure how much to save for retirement. But a new study by Edward Jones reveals clients may be equally clueless about how much they can spend in retirement.
The respondents were asked what percentage of their savings they think they can afford to withdraw every year. Only one-third (32%) appeared to have realistic spending expectations, a grim reminder that Canadians need to pay attention to managing their money while living in retirement.
According to Statistics Canada, the average 65-year-old will live to age 84 and there’s a 40% chance that one spouse in a couple will reach the age of 90. In addition, Canadians can expect to spend more than 20 years in retirement.
Considering the length of retirement, inflation and market fluctuations, Edward Jones recommends that 4% is a good starting point for Canadians when estimating their individual retirement savings withdrawals. Yet, according to the poll, almost half (49%) of respondents thought they would need to withdraw 6% to 20% of their savings each year. Alarmingly, one-in-five (19%) respondents thought they would withdraw more than 20% of their savings.
“By withdrawing even 10% of your savings each year you may be spending too much, too soon,” says Chris Gordon, financial advisor with Edward Jones. “Knowing how much you can spend in retirement is just as important as knowing how much to save.”
Someone who retires at age 65 with a nest egg of $700,000 and a 3% annual rate of return, and withdraws 10% of his or her savings each year will run out of money after only 12 years, at age 77, said Gordon. By withdrawing only 4% each year, that nest egg will last for 46 years – well past the one-hundredth birthday.
“Developing a spending strategy for your retirement years is as important as saving for retirement,” said Gordon. “Don’t let the years you’ve spent planning, saving and building your portfolio go to waste. A solid financial plan should get you to, and take you through, your retirement years.”