Gurus of all types tell us to stay in the present; never focus on the past and don’t dwell on the future. Great advice but they were clearly not thinking of RRSPs when they made that statement!
This past weekend I got to thinking about my RRSP savings. How much is enough and if at 37, am I on track to have enough saved? I decided to ask my father how much he had saved by my age and I nearly fainted at the number he gave me. My first reaction was uh oh, then a calmer state of mind came over me and I relaxed. I realized there was no point in worrying. Why? #1 Who knows what the future holds? #2 Everything always works out and the worrying is always for nothing. #3 I may not be single forever; although I have to stay in the present and remember that is life now. You can only plan based on the present state of your life and circumstances. What ifs cause too much trouble!
How much RRSP savings are enough for a single?
What a challenge this was! I Googled “RRSP savings for singles”. Nothing. Nada. In essence, the concept of RRSP savings is the same if you are single or married. You just remove a few factors from the calculation. Base it on just your income only, if you are childless or not, how much mortgage you have left – you get the point.
The mortgage part is the biggest difference for singles. The income to mortgage payment ratio variance is a lot higher for a single than a double income household. For example, let’s say as a single you make $75K (gross) a year and have a $300,000 mortgage; whereas a double income household could be making $150K (gross) a year with the same $300,000 mortgage. What is the point? As a single, you are probably contributing significantly less to your RRSP than a double income family. Less meaning not enough to retire on.
I tried out a great RRSP calculator at GetSmarterAboutMoney.ca to see how far off I am as a single.
It was all fantastical with fairies and unicorns until I plugged in the numbers and for the second time almost fainted. Here’s why:
Amount currently in RRSP accounts: $50,000
Annual rate of return while you’re working: 4%
Contribution amount and frequency: $184 monthly (not including employer contributions)
Current Age : 37
Number of years until retirement: 25 (age 62)
And once I’m retired, if I have 25 years living retired at a 2% annual rate of return:
At retirement, your RRSP savings will be worth $230,288.09, which will provide an annual income of $11,795.46 over the course of your retirement.Photo by Ciccio Pizzettaro c/o Flickr Creative Commons
ACK! I do not think anyone can live on $11K a year! Small wakeup call but I am not panicking. I am on the road to financial freedom and will be able to start making much larger contributions. How is that for motivation to get out of debt?
You still haven’t told us how much is enough! Alright, don’t get your underwear in a knot!
Think of your current lifestyle, your current budget and your gross income. Think of how you would like to live while retired. The rule of thumb that most financial gurus go by is 70% of your working income. Points to keep in mind: you are no longer having to pay CPP or EI, not paying for children anymore. Many of the expenses you had while working go away or are significantly reduced.
Check out this fantastic vid from Malcolm Hunter and Rob Carrick (Globe and Mail) explaining How much you need to save for retirement
My short-term plan: Debt freedom before 40, rent not buy a home/apartment and then throw as much as I can into retirement. I am still debating the home purchase idea. In the video, they suggest not doing this after 40 but I do need somewhere to live.
Another tidbit from the conversation my father and I had:
A simple question – “You have never seen debt freedom in your life, have you?”
My answer: Once and only briefly.
All of that is changing my friends, it is all changing.
If you’re single, do you find it hard to pay for life and contribute to your RRSP?