About a year and a half ago, the Canadian government implemented a federal carbon tax to put a price on carbon and attempt to combat climate change. The event spurred me tweet out a money saving thread, highlighting just how much young people need to save in order to live through their retirement comfortably.
I received more feedback on this tweet thread than any other tweet ever.
So I figured I’d turn it into an official blog post.
Here’s essentially a copy and pasting of the thread:
A quick money saving tweet thread, in light of carbon taxes hitting Canadian provinces. Ignore, if you want.
Lots of variables here, but lets assume you want current-value $70,000 CAD/year in retirement ($35,000/spouse), you retire at 67, and you live for 20 years in retirement.
Assuming 2% annual inflation, today’s $70,000 CAD is worth about $125,000 CAD 40 years from now. In order to have $125,000 of annual retirement income, starting at age 67, for 20 years (until age 87), you’d need to amass $1,860,000 of retirement assets.
In order to amass that amount of assets, someone starting at my age of 27 needs to save about $750/month every month for the next 40 years, assuming a 6% or 7% return. If you’re older, you have to save more per month. Younger, less.
$750/month is a lot of money.
I’d argue this has to be done outside of equity growth in your home. Your home may be sold one day to fund life in an assisted living center, but equity in your home doesn’t put food on the table in retirement. You need cash paying assets of just under $2,000,000.
Lastly, our government is in a budget deficit, which means taxes must go up in the future to pay for our parents’ and grandparents’ improper governmental spending. So it’s very likely you’ll keep much less of that $125,000 in the future than you would $70,000 today.
Our parents/grandparents, who are Baby Boomers and Gen Xers, are huge demographic groups who are only starting to enter into our healthcare system.
If our gov’t has budget deficits now, before these groups really start to utilize our healthcare system, imagine how much healthcare costs are going to go up in the future? Since we’re in a single-payer system, that means taxes must go up in the future.
In summary, saving for retirement is very difficult and you have to start now. Inflation kills the value of your current saving. Taxes are high now, but they must go up because of current imprudence.
All I want to provide, as a father, is a childhood and a future for my children than is better than my own. As it stands, a look at the future seems bleak from a financial standpoint. And every time a new tax is added, it only gets that much more difficult.
Some of these numbers will change as we move into the future. For one, I’m no longer 27 years old. I now have 2 children. My retirement amortization schedule is now 38 years instead of 40.
Perhaps life expectancy changes and we can expect to live longer. Perhaps you don’t need $70,000 CAD per year (today’s dollars) to retire (though, I’d still argue this number is reasonable, as it provides about $4,000 per month of after-tax income or so; however, it doesn’t include a dual retirement income household.)
You can nitpick it to death — people love to nitpick anything finance-related to death, as money has a way of self-confirmation bias being inherently built in.
But the fact is that young people somehow need to save between $500 and $1,000 a month — either in cash savings or in equity growth — and that is very, very difficult to do while starting a family, paying high rates of tax, absorbing the increase in food prices due to the aforementioned carbon tax, and somehow still having something left over to enjoy life.
More than anything, having a plan is the single most important thing one can do to combat the difficulties of saving for retirement.
Warren Buffett was (reportedly) notoriously thrifty when he was younger, as his knowledge of compound interest churned through every one of his purchase decisions. He famously stated that a $1 ice cream cone actually costs $18, as $1 over the course of your lifetime can grow into $18 through the power of compound interest.
So, if $1 turns into $18, then $50 turns into $900.
My point: Save every bit you possibly can. It’ll be worth something a whole lot larger than it’s worth today.