How much to save?

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  By Guest Blogger Sinan Terzioglu

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A recent survey by the Canada Pension Plan Investment Board shows that nearly two-thirds of Canadians worry about running out of savings during retirement. This concern is especially high in younger adults, 28 to 44, with 67% experiencing anxiety. With 70% of working Canadians expected to retire without employer pensions, it’s essential for most to carefully review their budgets and increase their savings rates.

What percentage of income should most be aiming to save?

The 50-30-20 rule is a popular budgeting strategy that suggests allocating:

• 50% to needs (housing, groceries, transportation, recurring bills)
• 30% to wants (restaurants, entertainment, travel)
• 20% to savings (retirement, debt repayment)

I like this guideline because it’s a balanced approach to managing finances, ensuring that essential expenses are covered while still allowing for discretionary spending and savings. However, for many people today, housing and transportation are the largest expenses, often taking up more than 50% of their income. For those finding it difficult to save at least 15% of their income, I suggest the following:

1. Consider renting to keep shelter costs below 30% of gross monthly income – In many regions, renting is often much cheaper than owning a home. While it has its own challenges and may not be practical everywhere, those in their 20s, 30s and 40s can gain substantial benefits by delaying home purchases until their late 40s or beyond. This approach enables them to save and invest more money, benefiting from the power of compound growth over time. Additionally, renting provides benefits such as flexibility, lower upfront costs, and freedom from maintenance and repair responsibilities.

In a recent Globe & Mail article, Preet Banerjee put it well:

“If you’re renting, you’re just throwing money away.” It’s one of the most misinformed adages in Canadian society and a mantra of previous generations who mean well but are out of touch. What they fail to realize is that while renters rent space, homeowners are also renters. They rent money.

2. Reconsider purchasing a $75,000+ vehicle and keep monthly transportation expenses under 10% of gross monthly income – Avoid withdrawing from your TFSA to buy a vehicle. If you have available contribution room in your registered accounts (RRSP, TFSA, FHSA, and RESP), ensure that your monthly car payment does not exceed your monthly contributions to these accounts.  If purchasing a vehicle, keep the cost to below 10% of your net worth.

3. Allocate at least 50% of your savings to low-cost, diversified global equity ETFs – To stay ahead of inflation, it’s crucial for most people to invest in equities, as they have historically provided higher returns compared to other asset classes, particularly GICs. Remain invested, maintain a long-term optimistic outlook, and continue adding to your investments over time.

How much should you have saved at each age?

Since everyone’s goals and circumstances vary, there isn’t a one-size-fits-all recommendation. However, I believe the following guideline suggested by Fidelity is a good starting point for most people:

Example – Tom and Jill, both 35 years old, each earn $75,000 annually. Without defined benefit pensions for retirement, they have saved $100,000 each in RRSPs and $50,000 each in TFSAs, aligning with Fidelity’s savings target for their age. They have been saving about 15% of their incomes every year and don’t expect to earn significantly more over the balance of their careers. Currently renting a home for $3,000 per month, they want more space because they are expecting their first child. Additionally, they are feeling pressure from family and friends to buy a home, as they constantly emphasize that home ownership is the key to financial success.

Homes in their area cost around $1,100,000. They are considering whether they can afford such a home while staying on track to meet their savings goals and retire by age 60. Currently, they spend less than 30% of their gross incomes on shelter costs. If they continue with their current spending habits and save and invest 15% of their income, earning an average annual return of 6%, their savings will exceed $1,800,000 by age 55, surpassing Fidelity’s target for that age. However, purchasing a $1,100,000 home now would require them to withdraw at least $250,000 from their savings for the 20% down payment, closing, and moving costs. This would breach Garth’s rule of 90, which advises that 35-year-olds should limit their primary residence equity to 55% of their net worth, or $165,000 for Tom and Jill.

The monthly mortgage payment, along with property taxes, insurance, utilities, maintenance and opportunity costs, would be much higher than their current housing expenses, surpassing 50% of their gross household income. This would hinder their ability to save and invest as they currently do. They would transition from being debt-free and on the path to financial independence to having most of their net worth concentrated in a single asset and incurring significant interest expenses for many years.

My advice to Tom and Jill is to embrace renting at least until later in life and continue prioritizing saving at least 15% of their incomes. With careful financial planning and goal setting, this can be a strategic decision that leads to significant wealth accumulation and increased cash flow over time. This approach will reduce financial stress and provide them with greater flexibility and options. Most importantly, it will ensure a more financially secure future for their family.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “Here is a picture of Tilly just after visiting the groomer this afternoon,” writes Herb. “Just in case you are running short of dog pictures. Fourteen months old now, her personality has evolved so much. She is the Queen of the street and neighbourhood. She wants to meet every living thing – people and dogs especially. She pays no attention to human politics, portfolios or other world concerns. She lives to socialize, eat, play and sleep … she engages in the world she has. She does seem to like baseball, her favorite team is the Los Angeles Doggers. Very happy so far with the World Series. Likes their dogged determination. Thank you Garth et al for the free info and advice, very helpful thru the years to our family. Very appreciative.”

To be in touch or sed a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2024/11/10/how-much-to-save/