Everyone is talking about investment fees these days. There are ads on the radio, television, and online… there are podcasts, websites, blogs dedicated to low-fee investing… there are also books, magazines and research studies… all focused on one thing… how much the average investor pays in fees while saving for retirement.
But very few people are talking about the effect investment fees have on retirement itself. Mostly they talk about how fees impact you as you save for retirement, but very few mentions what happens if you continue to pay high fees as you enter retirement.
Fees definitely have an enormous impact on how much you can save for retirement. The average mutual fund fee is 2.35% in Canada, and that’s the average, there are lots of situations where the fee is even higher. The effect of this fee on a lifetime of savings and investments is enormous!
But what if you’re close to retirement? What is the impact then? Arguably the effect of investment fees on retirement planning is even greater than any other period.
Fees have an enormous effect on retirement planning because by the time we’ve reached retirement we’ve already saved up a huge nest egg. Unlike the accumulation phase, where you have limited assets in the beginning, when it comes to retirement, you’re starting with a huge amount of investment assets. This makes the impact of fees enormous, especially in early retirement.
The problem for retirees is that investment fees are hard to spot, hard to find, they’re almost hidden by investment providers, whether that is intentional or not. I’ve seen this on countless investment statements I receive from clients. Based on the statement alone you would NEVER know how much they’re paying in investment fees each year.
This isn’t an isolated issue, it’s a problem that many, many retirees face. Low-fee investing is a relatively new option in Canada. If you were investing 10-20+ years ago there just weren’t as many options to reduce your investment fees.
Many retirees who have high-priced investments are shocked (and somewhat saddened) to learn exactly how much they’re paying each year. It’s not their fault, this information is hard to find and not readily available to investors.
To figure out how much an investor is paying each year usually requires some digging. Mutual fund codes vary by fund and fund class. Sometimes fees can vary by 1% or more for the same mutual fund depending on the class.
But once you know how much you’re truly paying you can start to see the impact it will have on your retirement plans. There are two main effects that high fees can have on retirement, and the impact can be substantial.
In this blog post we’re going to look at an average retirement plan with $1,700,000 in financial assets. Why $1,700,000? Because that’s what a recent bank survey suggested that the average Canadian feels they need to retire.
Now, banks are in the business of selling financial products, so they may be somewhat biased when it comes to how much you should be saving for retirement. They’re probably happy for you save and invest more for retirement because it means more investment fees for them. But let’s give them the benefit of the doubt and let’s see if $1,700,000 is really the right retirement goal for the average Canadian household.
Having done many, many, advice-only retirement plans I suspect that this number is grossly overstated, and a much smaller amount is likely sufficient to have a comfortable retirement for the average household.
To test if this is true, we’re going to build an “average retirement plan” with $1,700,000 in financial assets.
Of course, no retirement plan is ever average. Some people have more CPP, some less. Some people have defined benefit pensions, others do not. Some people want to spend more in retirement while others are content with spending less. There is no such thing as an “average retirement plan” but we’re going to make some broad assumptions to test whether or not $1,700,000 is a reasonable goal for retirement assets or if it’s grossly overstated.
You may have noticed a new term starting to creep into the mainstream financial media, that term is FIRE, and you might be wondering, “What the heck is FIRE? And how is it related to personal finances?”.
FIRE is an acronym that stands for Financial Independence/Retire Early. The basic idea is that if you pursue FIRE you can eventually stop working for money. You can be financially independent. You can do anything, retire early, keep working, volunteer, basically you can have more freedom.
The idea is that with enough savings/investments you’ll eventually reach the point where you can live off your investment income indefinitely. Once you reach this point you’re considered financially independent, you no longer NEED to work for an income, and can retire to a life of leisure (although you may choose to continue to work, change roles/professions, start a business, or volunteer).
While the concept of early retirement sounds amazing, it does take quite a bit of focus and determination to get there. To reach FIRE it requires a high savings rate, very high.
The typical financial advice given to the public is to save and investment approximately 20% of your net income (part of the simple 50/30/20 budget).
But to reach financial independence retire early you need to save more, much more. To reach FIRE you need to have a savings rate somewhere in the 30%-70%+ range. The higher your savings rate the faster you can stop working for money.
Because it’s easier to reach financial independence/retire early with a high savings rate, the path to FIRE is made easier with an above average income. With an above average income, basic expenses are easily covered, and it becomes more about managing lifestyle inflation. People who pursue FIRE try to limit their lifestyle inflation to maintain a high savings rate.
FIRE is also possible with a below average income, but requires a lot of creativity to reduce basic expenses. This may include house hacking, avoiding car ownership, and more extreme lifestyles. To reach financial independence/retire early with a low-income you need to live an alternative lifestyle.
Reaching FIRE is one of those extreme personal finance goals, it’s a goal that isn’t for everyone.
Even though the end goal sounds appealing, it requires a lot of hard work and dedication along the way. Reaching financial independence retire early means living way below your means for the rest of your life. It’s a lifestyle more than it is an end goal. It’s a lifestyle with a lot of freedom, but it’s also a lifestyle that requires a lot of control.
If you’re able to control your spending, and save a large % of your income, then reaching financial independence might only be a few years away.
To find out how far away you are from financial independence you can make a copy of our FIRE calculator and quickly calculate how many years it will take to reach FIRE in your situation. It will help you estimate how many years from FIRE you are based on your net-income, current expenses, and existing savings.
We’ve used our FIRE calculator to create four examples of how to reach FIRE.
Spending is one of the most important factors in someone’s personal finances. Even a small amount of extra spending, over a long period of time, can have a very large impact on someone’s financial situation.
In this post we’re going to explore how large this impact can be. To do that we’re going to follow two people through their financial lives, from starting university all the way through to late retirement. Year-by-year we’re going to see how spending impacts their finances.
Spending is an interesting topic. It’s such an important factor in everyone’s finances and yet everyone spends money differently. We all value things differently, which means we choose to spend extra money on different things. This makes it very hard to figure out what “the right amount of spending” actually is. Spending is very subjective.
What makes it even more complicated is that we all have learned habits and behaviors that impact our spending. These habits are learned over time and can be very difficult to break.
Plus, we’re all impacted by our past spending decisions (ie locking into an expensive car lease, buying ‘too much’ house, putting a vacation on credit). Even if we have the best intentions going forward, these past spending decisions can be an anchor.
Spending also has a large impact. A small amount of extra spending can have a large impact over time. Compounding means that just a little bit of extra spending, over a long period of time, has an enormous impact on our financial lives.
As an example, spending an extra $10 per day seems small. It’s pretty easy to spend $10 per day. This is a coffee every day plus a purchased lunch every other day. This is a nice meal at a restaurant once per week. It’s an extra piece of clothing every week or two. Or it could be a slightly larger home costing an extra $100,000, which comes with extra interest expenses, extra property tax, and extra heating and maintenance costs. It could be driving to work instead of walking, biking or using public transit. Or it could be a combination of these things.
Even though an extra $10/day in spending seems small and is easy to do if you’re not paying attention, over time it has a huge impact on a person’s financial life.
This post will follow two people through their financial lives, with one person spending $10/day more than the other. It may seem small, after all it’s only $10, but that adds up $3,650 per year, or $36,500 every 10-years, and that doesn’t even account for compounding.
By following two people through their financial lives we’ll see how spending an extra $10/day causes their financial lives to diverge dramatically.
For our example we’ll use two friends from high school, Katie and Kyle, they’re both 18 years old and about to enter university. They’re both entering an engineering program and have very little saved for university. They’ll use student loans plus summer jobs earning $12,000 per summer to help pay for their education.
Most important however is that Kyle is the more spendthrift friend out of the two, spending an extra $10/day than Katie. This habit of spending vs saving will continue throughout their lives with Kyle always spending $10 more per day and Katie saving that $10.
Let’s follow Kyle and Katie through a few periods of their life. We’ll see how a seemingly insignificant $10/day can cause their financial lives to diverge dramatically over time.
When it comes to personal finance there are many different milestones and each one is its own individual achievement. Personal finance is full of achievements you need to ‘unlock’ to be successful. The more achievements you unlock, the more successful you’ll be at building wealth.
To ‘win’ the money game you need to hit a certain number of milestones along the way. Some achievements are required before you can move forward in the game. Others enable you to accelerate your wealth even faster. And then there are some achievements that are just interesting check points along the way.
Here are 30 personal finance achievements you need to unlock!
How many have you unlocked already?
What if you maximize your TFSA and RRSP each year, how much money would you have in the future? If you just had one singular focus, how much could you accumulate? And would it be enough for retirement?
The TFSA and RRSP are two amazing tax advantaged accounts. They allow investments to grow tax free or tax deferred. They can be used to save and invest for retirement. Over time these contributions grow considerably with dividend income, interest income, and capital gains.
For the RRSP, new contribution room is based on 18% of the previous year’s employment income.
For the TFSA, new contribution is a set amount that grows with inflation in $500 increments.
Depending on your income level, maximizing both your RRSP and TFSA could mean a savings rate of 20%, or 25%, or 30% or even 35%+ at lower income levels.
That’s a high savings rate!
So, we can already anticipate that by maximizing the RRSP and TFSA every year we will probably end up with a sizable amount of financial assets, but how much exactly?
Is it $1 million?
Is it $2 million?
Is it $3 million or more?
In this blog post we’re going to have a little fun; we’re going to take a look at how much money you could accumulate if you just maximized new RRSP and TFSA contribution room each year.