Can My Friend Retire with No Savings at 40?

[StatGuy2000]

Hi everyone. I have a good friend of mine who lives near Toronto, Canada and has a great job ($90000 per year) in an area that he loves and feels passionate about. However, due to some unfortunate choices in years past, he is now 40 years old and has no savings whatsoever, nor does he own any significant property (he's currently renting a condo at around $1500 per month -- fortunately, he works from home so he saves money on commuting).

He is currently making the effort to save money to make up for this (probably around $2000 per month). My question to you on PF forums is this: do you think he will be able to save enough money to retire by age 65-70.

I appreciate any opinions or feedback that you may have.

 

[dragoneyes001]

the job he has is paying into the CPP? because that may be the only income he may end up with. RRSP's started late will be pretty small at best as an income.
if he's squirreling away 2k/month that should give him a nest egg of about 480,000 in 20 years as a lump sum. if he's putting it into an RRSP it could become a decent amount with interest and no taxation on it but all that said his CPP will still be the primary income the RRSP would be more for a supplemental income to live above the poverty line.
what he should do now is actually buy a house if his work is steady enough to get a mortgage the 1500/month (you said year I'm pretty sure you meant month) paying into a house instead of a strangers pocket will pay off big at retirement time.a house has additional costs but actually owning it by the time he retires cuts a huge cost of living on a monthly basis which let's him live better with what he will have.

 

[StatGuy2000]

the job he has is paying into the CPP? because that may be the only income he may end up with. RRSP's started late will be pretty small at best as an income.
if he's squirreling away 2k/month that should give him a nest egg of about 480,000 in 20 years as a lump sum. if he's putting it into an RRSP it could become a decent amount with interest and no taxation on it but all that said his CPP will still be the primary income the RRSP would be more for a supplemental income to live above the poverty line.
what he should do now is actually buy a house if his work is steady enough to get a mortgage the 1500/month (you said year I'm pretty sure you meant month) paying into a house instead of a strangers pocket will pay off big at retirement time.a house has additional costs but actually owning it by the time he retires cuts a huge cost of living on a monthly basis which let's him live better with what he will have.

A number of points worth considering:

(1) The average price of a single-detached house in Toronto has now reached the $1 million dollar mark (of course, since he does telecommute, he does have options living further away from Toronto). See the following article below.

http://www.thestar.com/business/rea...onto-detached-home-shoots-past-1-million.html

(2) My friend is indeed paying into the CPP, but that is hardly enough money to live on (even by the definition of living above the poverty line). Is $480000 in addition to the CPP enough to live on?

 

[dragoneyes001]

1) the living further out would be a must to get an affordable house but you said he works from home so that should be a possibility.

2) CPP is a joke even with a good annual income to pay into it its little more than a stipend. the 480k would make it a livable wage/month for a number of years depends on life expectancy. say he expects to live to the average of about 85 or 20 years beyond retirement. that would give him 24k/year + CPP which would be a comfortable existence but no splurging. it could also cover the costs of a home (taxes repairs ...etc..)

 

[dragoneyes001]

something i should add is your friend should (as soon as possible) invest in a good post retirement health insurance one that will cover medical AND pharmacy costs.

 

[Vanadium 50]

If he invests his money and gets 3% over inflation, he will have at 65 an income of ~$37K per year, plus whatever he gets from the government - I assume this is what CPP is. At 70, it will be ~$48K per year. Whether he can retire on that or not is something only he can decide.

 

[dragoneyes001]

CPP= Canadian pension plan. the pay out is based on amount payed in over a 30 year period. I won't speculate on how much he would be entitled to it can vary widely.

 

[Astronuc]

(1) The average price of a single-detached house in Toronto has now reached the $1 million dollar mark (of course, since he does telecommute, he does have options living further away from Toronto). See the following article below.

http://www.thestar.com/business/rea...onto-detached-home-shoots-past-1-million.html

That's insane!

If one can, one should buy an affordable dwelling, ideally close to work to save transportation costs, or otherwise, working at home, as well as saving as much as possible.

 

[dragoneyes001]

That's insane!

If one can, one should buy an affordable dwelling, ideally close to work to save transportation costs, or otherwise, working at home, as well as saving as much as possible.

yeah it is but you can stay reasonably close to Toronto and have much more realistic pricing or head towards the Quebec border maybe about 1 hr away from TO towards the farmlands and the prices will be much lower.

 

[jtbell]

If he saves $2K per month for 25 years (to age 65), and increases it to keep up with inflation, that's a total of $600K in contributions (in today's dollars).

After my first 25 years of saving into my 403(b) account (tax deferred retirement account), my total accumulation in 2010 including growth was about double my total contributions. Note that 2010 was about a year after the bottom of the most recent stock market crash. This period also includes the "dot-com crash" in about 2000-03. About 60% of my account is a very broadly-diversified stock mutual fund. The rest is a stable-value fund which has returned 3-4% per year.

If he gets similar results to mine, he will have around $1.2M at age 65. A common rule of thumb says that he can start by withdrawing 4% ($48K) a year at that point, thereafter increasing that dollar amount to match inflation, and have a very good chance of the money lasting for 30 years (age 95).

Add to that his CPP. Would that be at least in the same ballpark as Social Security in the US? Someone earning that much money would get more than $20K per year in Social Security starting at age 65 (in today's dollars, adjusted for inflation); more if he delays collecting, up to age 70. (This is under current law of course, which is likely to change sometime during the next 30 years.)

$48K + $20K gives $68K per year. If he's saving $24K per year out of $90K salary, he's actually living right now on... $66K.

Working a few years longer would of course increase the amount he ends up with, and decrease the number of years it has to last.

 

[Borg]

It's all about money in and money out. It seems obvious but the best way to save is to cut expenses. Your friend's salary is $7500 per month which I'll guess is around $5000 after taxes. Subtracting the $1500 rent and $2000 savings means that he is probably spending at least another $1500. That isn't too bad but he should still look at those expenses to see where he can save. I have lots of co-workers who go out to lunch every day. They're spending hundrends per month for meals that they could make far cheaper at home.

As for the cost of housing, when I moved to DC, my job did not pay well enough to afford much. I didn't have the income or savings to buy a house and paying a thousand or more per month in rent would have delayed my being able to save enough for a down payment. I chose to purchase a cheap but nice mobile home. I paid it off quickly and had only the lot rent of a few hundred each month. It's amazing how quickly you can save when you get rid of your housing costs. When I was finally ready to buy a house, the mobile home was nice enough that it sold quickly. I think that your friend could cut around $2000 per month in spending and double the amount saved.

 

[dragoneyes001]

i have to agree with the idea of a mobile home as an alternative to rent just one issue and that's a TO winter which is much colder than a DC winter. although modern RV's can be kept pretty warm even in winters there. just costs more for a few months.

 

[StatGuy2000]

It's all about money in and money out. It seems obvious but the best way to save is to cut expenses. Your friend's salary is $7500 per month which I'll guess is around $5000 after taxes. Subtracting the $1500 rent and $2000 savings means that he is probably spending at least another $1500. That isn't too bad but he should still look at those expenses to see where he can save. I have lots of co-workers who go out to lunch every day. They're spending hundrends per month for meals that they could make far cheaper at home.

As for the cost of housing, when I moved to DC, my job did not pay well enough to afford much. I didn't have the income or savings to buy a house and paying a thousand or more per month in rent would have delayed my being able to save enough for a down payment. I chose to purchase a cheap but nice mobile home. I paid it off quickly and had only the lot rent of a few hundred each month. It's amazing how quickly you can save when you get rid of your housing costs. When I was finally ready to buy a house, the mobile home was nice enough that it sold quickly. I think that your friend could cut around $2000 per month in spending and double the amount saved.

The thing is, mobile homes are (as far as I'm aware) rare in Canada, at least in Ontario (things could be different in other provinces) -- I have never met anyone in this country that owns a mobile home, nor am I aware of too many places in the country with lots to rent.

 

[Borg]

The thing is, mobile homes are (as far as I'm aware) rare in Canada, at least in Ontario (things could be different in other provinces) -- I have never met anyone in this country that owns a mobile home, nor am I aware of too many places in the country with lots to rent.

I did a Google search and got 13 hits in the Yellow Pages link.

 

[dragoneyes001]

Ontario has some pretty big RV parks the last tornado in Ontario hit right beside one.

 

[StatGuy2000]

Well, I live in Toronto (and my friend lives near Toronto), so this may skew my perspective on this.

Borg, I saw your Yellow Pages link, and the 13 hits you got were all near Montreal -- perhaps Montreal is different from Toronto in that respect (among many other differences).

 

[Borg]

Hmm. I don't know why I put Montreal in my search instead of Toronto.

 

[dragoneyes001]

Hmm. I don't know why I put Montreal in my search instead of Toronto.

you were thinking of nightlife not RV's that's why

 

[George Jones]

I grew up in southern Ontario, and I remember trailer parks, but, since 1998, I have only lived two years in Ontario (2003 - 2005), and according to a 2014 Toronto star article, things have changed

http://www.thestar.com/news/gta/2014/04/12/is_this_the_end_of_the_urban_trailer_park_in_ontario.html

I lived in Saint John New Brunswick from 2006 - 2011, and there was a nicely maintained trailer park there. Also, here in Prince George BC, I have a friend (a widowed senior) who lives in a nicely maintained trailer park.