Ruth Saldanha: A million dollar seems like an awful lot of money to have in hand right now, but is it enough for you to retire on? What are some of the things you need to keep in mind to calculate a retirement fund and decide how much money you need? With me to discuss this from our head office in Chicago is Christine Benz, Director of Personal Finance for Morningstar.
Christine, thanks so much for joining us
Christine Benz: Ruth, it's my pleasure. It's great to be here.
Saldanha: We've published a few articles in the last month about saving a $1 million for retirement, but is $1 million actually enough?
Benz: Well, I do think it's a mistake to try to set your target savings rate in a vacuum. You need to think about a couple of things. One is that, if your retirement is many years in the future, what seems like a lot of money today may not actually purchase that much when you're ready to retire. So, a $1 million, of course, is a lot of money, but by the time you get ready to retire, the prices of everything that you need to buy during your retirement may have inflated. So, keep that in mind. And then if you're closer to retirement, it's really important to keep in mind, how much you plan to spend from that portfolio. So, to use a simple example, let's say, you have a $1 million, but you're planning to spend a $100,000 of it a year. Unless you are planning a very short retirement, a 10-year retirement maybe, you are going to run out of that money in a hurry. So, you do need to take into account inflation as well as your own particular situation.
Saldanha: What are some of the factors to keep in mind, when you decide what size of a retirement fund you need?
Benz: Well, you do need to think about spending rate, how much you plan to spend from that portfolio per year. You also need to think about the expected duration of you retirement. So, most of us should plan for a long retirement of 20 or 30 years or more. Because I think we'd all say that we'd rather be safe than sorry than risk running out of money because we lived longer than we expected to. So, plan for a nice long retirement. You also need to take into account the complexion of your investment portfolio. So, portfolios that have more in stocks over time have tended to return more than portfolios that have a lot staked in very conservative assets like cash, like bonds. So you need to keep in mind a variety of different individualized factors when thinking about how much to set aside for retirement
Saldanha: Christine, how does debt play into this equation, especially big ticket debt like a mortgage or say a large student loan?
Benz: Well, for most of us, we will be multi-tasking across numerous financial goals throughout our financial lives. Often times, when we emerge from college, we might have student loan debt or we might have near term obligations, whether mortgages or other outlays that we expect to spend on in the near term. So, we have to balance those debt paydown goals alongside the longer term goal of saving for retirement. One simple concept to bear in mind is think about debt pay down as offering you a guaranteed return on your money. So, if you have a mortgage rate that is, say, 4% currently. Well, you would need to earn at least 4% in your investment portfolio to make that a better return than what you could earn through mortgage paydown. So, think about that return on investment when determining where to allocate your precious assets.
Saldanha: Great. Thanks so much for sharing your insights with us, Christine.
Benz: Thank you, Ruth.
Saldanha: For Morningstar.ca, I'm Ruth Saldanha.
:quality(80)/cloudfront-us-east-1.images.arcpublishing.com/morningstar/EC7LK4HAG4BRKAYRRDWZ2NF3TY.jpg)
