Most people my age have a distorted view of retirement. I’d bet if you surveyed people aged 25-34 that more than half of them truly believe they will be able to retire early. The reason why these views on retirement are often misguided is because it’s nearly impossible to determine what your life will be like 30 – 40 years into the future.
Why Freedom 55?
We’ve all seen the financial services commercials portraying the couples who have retired early and are living their dreams in exotic locations. Why wait until you reach the standard retirement age of 65 to stop working and enjoy life?
But is Freedom 55 even a reality for the majority of Canadians these days? Life expectancy is a lot higher than it used to be, so when people are planning on retiring when they’re 55 they still have another 30 years ahead of them. Investment returns are expected to be lower in the long term. No longer do we see projections of 12-15% returns. And the rising cost of housing is making home ownership a lot less affordable in terms of the down payment required and the monthly cost of living.
I don’t usually give much credence to retirement calculators since most of them are too rigid to handle the inevitable changes from year to year. But using some general assumptions let’s take a look at what it would take in order for a 30 year-old to comfortably retire at the age of 55:
Assumptions:
Rate of return to retirement – 6%
Number of years to retirement – 25 years
Savings Details:
Current value of investments – $50,000
Current investment contributions – $10,000 annually
Retirement Needs:
Income required – $40,000 annually
Number of years the funds need to last – 30 years
Retirement Outlook:
Annual income required – $40,000
Projected savings needed at retirement – $1,200,000
Value of investments at retirement – $796,157
Shortfall of savings plan – (403,843)
As you can see, this individual will end up considerably short of their retirement goal, and I was fairly generous with the starting point. I don’t know very many 30 year-old’s with $50,000 in savings who can also manage to set aside $10,000 a year for retirement.
Retirement Reality Check
Young people who are just getting started in their careers and learning how to invest can often convince themselves that they are on the right path towards early retirement. They pull out the retirement calculator, manipulate some numbers here and there, and just like magic they have achieved the early retirement dream!
The reality is that many of us have yet to really struggle with balancing our savings and investments while raising a family. That’s why retirement is so difficult to plan in your 20’s or 30’s. Who really knows where we will be at financially even 10 years from now?
Let’s look at real life examples of some of the difficult financial choices that we all may face down the road:
- Save for a down payment on a house vs. Contribute to investment account
- Take a job that you love for less pay vs. Take a job you hate for more money
- Stay at home parent vs. two income household
- Contribute to RESP vs. Make an extra mortgage payment
- Take a family vacation vs. Take your family to the dentist
- Replace the roof vs. Buy a 2nd vehicle
- Put your child in hockey vs. pay off credit card
If you try and save too much in order to reach Freedom 55, you might miss out on other great experiences with your friends and family. If you wait too long and don’t save enough, you might still be working in your 70’s.
The point is, trying to determine your retirement date 25 years in advance is next to impossible. Young people are better off trying to continually improve their financial situation each year so that their choices become less difficult over time.
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Robb Engen writes about Canadian personal finance at 
I really enjoy reading your blog, however I felt the need to comment on this most recent post. You have taken into account the future value of making the investments of $10,000 a year for 25 years, however you failed to take into account that the $800,000 in savings will also provide a return during retirement. If you calculate the present value of 30 payments of $40,000 using the same rate of investment of 6% you would only need $550,000 to make it work. The power of compound interest works on both sides of the retirement line.
Just thought I’d mention that saving $10,000 a year for 25 years will put you in good stead to retire at an early point.
Thanks for your comment Colin. You’re right about the investment return continuing on after retirement. As I mention in the article, most retirement calculators make very general assumptions due to lack of inputs, which is certainly the case here.
Most people don’t make the exact same contributions every single year until retirement. Saving $10k a year will definitely get you on the right track though.
Retiring early from what? If you enjoy what you do, why retire! My cousin who lives in Canada (Vancouver) is 82 years old and still works. He has his own company and he has reduced his hours, but he loves what does. Retirement would probably kill him.
@Krantcents
That’s the other thing that’s difficult to plan for. What are you going to do for 30 years when you are retired?
I plan to be able to retire early if I want to, this does not mean that I will retire if I am having fun at my job. If you choose to retire early, yes you choose not to do other things. As it is said, you can anything not everything.
I think young people confuse retirement with financial freedom. Like you say, it is tough to visualize a life 20 to 30 years in the future when life is changing so quickly. I like the concept of setting 5 year financial goals for saving, debt management, expense control and managing your net worth. These are the things that will help you achieve financial freedom at any age regardless of when you want to retire! Thanks for the great topic!
Great advice Jim! Breaking down your financial goals into 5 year increments can definitely be easier to manage and keep you on the right path towards financial freedom.
You’re right. Life doesn’t play out like the retirement calculator. Expenses crop up and you need to make choices. I’m sure some people sold Google stocks a few years back to buy a new car.
As far as retirement goes, I think it’s better off to find something you really enjoy doing and continue working as long as you can. Part time employment is the retirement of the future.
@retirebyforty – well said.
@Robb – I like the premise of the post, good article. However, as much as I enjoy investing for tomorrow I have no clue what is going to happen tomorrow, let alone 30 years from now
Discussions of this sort never seem to take major stock market crashes into account. There seems to be one or two every decade. I’m having a hard time convincing myself to buy stocks or index funds to save for old age when it could easily lose half its value or more. And that could happen more than once! The world economy has not recovered, I believe there is much more drama ahead of us.