Portrait Of An Ideal Saver
The money makeover profiles in the Globe & Mail, MoneySense magazine, and the Toronto Star are designed to give readers a peek into the life and finances of real families dealing with real money problems. But more often than not the articles feature high income earning couples who just want to know if they can retire early and still enjoy their lavish lifestyle.
Once the issues have been laid out, a financial planner tells the couple everything will be fine if they can just make a few sacrifices to their lifestyle, which include:
- Taking one, instead of two, luxury vacations per year
- Cutting back on the fancy dinners
- Reconsidering that condo purchase in Florida
The financial facelift is completed when the couple is advised, ideally, to max out their RRSP, TFSA, and RESP accounts while putting an extra 10 percent lump sum onto their mortgage each year.
Related: Should you pay off your mortgage early or invest?
The ideal saver
One thing I’ve learned from reading these stories, aside from many of them being out of touch with the average Canadian, is that we can’t do it all – we need to prioritize our financial goals.
To help illustrate my point, let’s look at an average Canadian household with two children and how much they’d have to put away in order to become ideal savers, like some of the ones listed in the money makeover stories.
The median family income after taxes is $76,000 in Canada, according to a Statscan survey. The average mortgage balance is $168,387.
For this couple to max out their registered and tax free savings plans, they’d have to contribute $13,680 to their RRSP, $11,000 to their TFSAs, and $5,000 to their RESP. That’s 39 percent of their net income saved – great job!
This couple also wants to pay off their mortgage early so, in addition to their monthly payment of $1,200, they’ll also pay a lump sum of $16,838 at the end of the year. That’s 41 percent of their net income going toward their mortgage.
The people:
Joe, 42, Jane, 40, and their eight and 10-year-old children.
The problem:
How to live on 20 percent of their income, or $1,267 per month, so they can pay off their mortgage and retire in five years.
Related: Can you live on $1,065 per month?
The plan:
Cut out all those non-essentials like groceries, clothing, transportation, cable, internet, and insurance.
The payoff:
Retire and then START LIVING!
What this blogger says:
I don’t doubt that some families could actually make this plan work (eating ramen noodles seven days a week). But for the majority of Canadians, we need to balance our saving and investing goals with a dose of reality – we can’t do it all.
That’s why I focus on two financial goals – paying down our mortgage and contributing to my RRSP. However, that comes at the expense of maxing out our tax free savings accounts and our kids’ RESPs.
We’re still on track to save about 30 percent of our income this year, and while I’d love that to be 50 percent, I’m content that we’ve struck a good balance between our financial goals and our day-to-day living expenses.
Related: What’s busting your budget?
I’d love to see more of these money makeover profiles featuring average Canadians who earn less than six-figures a year and who are just trying to figure out what to do with that extra $200 per month after all the bills are paid.
One series that’s worth checking out is on the Len Penzo blog, where his readers share how they live on less than $40,000 annually.
And usually the people in these money makeover profiles have big fat Defined Benefit pension plans. They are definitely not your avg Canadian.
I did see a profile of a couple with a similar financial situation a couple of months ago, maybe 5 years older but with a similar house value, similar financial investments, similar retirement objectives and timelines. I saved that one away so I can review it in about 5 years to compare. The advisors gave some good insight as to where this couple needed to get to, be able to retire comfortably. It will be interesting to compare in a few years, when we reach their age (late 50’s).
@Dave – To be fair, I have read some good ones. Nice idea to save them when you find one in a similar situation.
My cousin and I both applied to the Globe makeover but they never got back to us. She makes 55K per year and I make 49K.
We are pretty average but the papers must think average is boring.
The Financial Post does offer the same thing on Fridays and a lot of those people are pretty screwed up financially.
@Jane – The really bad ones should get sent to Gail’s show to do a “Til debt do us part” makeover.
Great practical advice about balancing and prioritizing family financial goals — thanks
According to a Statistics Canada study “Household debt in Canada”(Raj K. Chawla and Sharanjit Uppal, March 23, 2012) households earning $100,000 or more in 2009 represented 31% of the Canadian population but 37% of debtors with an average debt of $172,400 per borrower. The latter stat compares to an overall per-borrower debt of $114,600. Debt is a real problem for even high income earners.
The study speculates this is simply because high earners can afford to carry more loans, but I suspect another reason is that much of that debt is driven by high real estate prices and perhaps the costs of their post-secondary education.
I have to admit that I’m fascinated by how the seemingly well-to-do can also face the same debt problems that average Canadians face, and that the lessons learned can apply to most of us as well. Also, a higher salary isn’t necessarily the end-all answer to debt problems if we’re careless with our finances.
@Daniel – People can overestimate their income earning potential, or at least the potential for a raise or promotion, and then adjust their lifestyle sooner than they should.
Jane,
I write Monday Makeover for the Toronto Star and would love to hear from you if you are still interested. You can email me at deannegage@gmail.com
@Deanne – thanks for stopping by!
thank you for my first belly laugh of the week. i have made comments to both the g&m and moneysense that they are not in the real world with their choices. YOUR advice is excellent. people are taking notice of b&e — you two use common sense along with financial knowledge! thank you!!!!!
@Gary – thanks so much for your kind words and support of our blog – we really appreciate it!
You paint a pretty unrealistic picture there Robb! We pull in just over 100K combined from our day jobs and I’ll tell you were are saving nowhere near that much!
For the past few years I’ve just been maxing out our matching investments at work for the most part and paying down debt aggressively. Can’t do much more than that and still enjoy living how we want to. We paid off our first mortgage in five years and are now set to pay off our new SUV in 2 years.
Hopefully next year I’ll sit down and come up with a detailed financial plan with some projections to see how on track we are for the future.
@Stephen – You’ve accomplished a lot in a short time and it’s no small feat to pay off a car in two years. Keep up the great work!
I have been reading the book “The Real Retirement” by Fred Vettese & Bill Morneau which is subtitled – Why you could be better off than you think.
It has some interesting content, but I almost put the book down when I read, “…the average reader is probably earning…$100,000” and has paid the maximum to CPP and contributes to an employer pension plan. I may be delusional, but I don’t understand why people in this financial situation would be worried about their income in retirement.
Rick Waugh, president of Scotiabank gives the book a ringing endorsement, quoting their ubiquitous slogan – you’re richer than you think. Riiiight!
marie — i was going to make a sarcastic comment but i think your post says it all! thank you.
@Boomer – I guess it makes the book seem longer when you can list 7 or 8 retirement income sources rather than 2 or 3.
Glad to see you call the newspapers out on these makeovers for the well-to-do. Another head-scratcher is the fact that the financial advisors who take on the cases invariably seem to think the subjects need to die with all their retirement savings intact. Really, it’s ok to spend SOME of it along the way: did you save the money for yourself or for your kids?
@Paul – Yes, exactly. What do you need $2.5MM for when you’re 75?
Most of the people who read this column have an interest in investing and saving and having a healthy happy retirement. Most of them seem to be in their 30s or 40s or, if they are older, have a pretty good retirement plan in place. Maybe not as rosy as the G&M and MONEYSENSE examples, but pretty good overall. My wife and I are NOT in either group. We are both closer to 60 than 50, we have little or no RRSPs, RESPs, or savings, small or non-existent pension plans, and we are still paying off a $150,000 Line of Credit (a mortgage by any other name). We have no other debt, but in the last couple of years we are realizing that if we ever want to stop working (she wants to quit in 14 months and start collecting her OAS and CPP, I will need to work at least 2-5 more years to pay down and create some savings). Every time I read about how much the financial advisers say you need to have to survive retirement with minimal cat food in your diet, I think, “WE are so screwed!” How we got here doesn’t really matter – it is a fact that this is where we are. The question is, what do we do now?
Hi Robin — You’re not alone. In fact, my situation was and is comparable although there’s been significant improvement. Fortunately, my wife and I are savers and passionately frugal. Susan Eng of CARP told me years ago to ignore those glittery marketing ads about golf and vacations in retirement and to concentrate on health instead. I don’t see retirement in my future until well after 65. But that’s a good thing: I gain satisfaction from my work which tends to be project based (like most positions these days). If worst comes to worst, I will work security or whatever else it takes to improve our savings. If you’ve got your health, there’s definitely hope — regardless if we’re not “richer than we think.”
@Robin – thanks for your comment. Many of our blog readers tend to be close to your age and financial situation. They may not comment much, but they do email us from time-to-time.
One of them mentioned we should start a forum so the readers could all discuss and share the realities of retirement (and planning for retirement). Might not be a bad idea.
Great post Robb! I always wondered the same thing, when I read these profiles. There’s no way I could save that much and still have enough to raise a family and pay the mortgage. Like you said the key is to strike the right balance between living now and retiring early. I know my stream of dividend income will certainly help me in achieving my financial goals.
@Kanwal – No doubt it’s tough to balance the desire to save and invest all your money with the reality of raising a family and paying the mortgage. There is a happy medium, though, and I’m sure you’ve found it too.