It’s a crazy question to ask. I mean, $2 million is a LOT of money, right? You should absolutely be able to retire comfortably with that much money!
Except that it isn’t as much as it used to be. Over the years, inflation eats away at the value of our money, and the purchasing power of a number as impression as $2 million gets lower and lower. But is it still enough to retire on? Let’s take a closer look.
The Short Answer: It Depends
Nobody can tell you with certainty whether $2 million can last you through retirement, and anyone who says otherwise is lying to you. There are a number of variables to take into consideration when trying to answer this question, so let’s get into each of them so that you understand why they matter to you.
One note before we get started: we’re talking about your nest egg here, so to keep things pure, I’m going to assume you get $0 from government programs like CPP, OAS or GIS.
Your Desired Lifestyle
Are you looking to travel the world, or do you plan to be more of a stay-at-home type of person in retirement? The two scenarios require very different amounts of money in the bank.
If you’re planning to stick to a tight budget that includes a minimum of travel, $2 million might be enough. But if you’re the type that wants to hop on a plane four times a year, then unless your retirement timeframe is really short, $2 million likely isn’t going to cut it for you.
Where You Live
Different parts of Canada have different costs of living, why is why where you live plays a role in determining whether $2 million will be enough to get you through retirement. Even within a given province, living in smaller cities can be much cheaper than living in major metropolitan cores.
Let’s compare Toronto to Ottawa. According to this site, Ottawa is almost 20% cheaper to live in than Toronto. That’s a big difference, and one that matters when it comes to answering the question of whether $2 million is enough to retire on!
How Long You Expect to Live
Your life expectancy dictates how long you’ll spend in retirement, and the longer you live, the more money you need to get you across the finish line. For example, say you knew you only had 10 years to live in retirement. In that case, eve without investing your money, you’d have $200,000 a year to spend – more than enough to live a comfortable retirement.
But what if we changed that number to 50 years instead? Well, without investing your money, you’d have just $40,000 a year to live on… and inflation would destroy that purchasing power over time. Even with your money invested and living a frugal lifestyle, $2 million likely isn’t enough to sustain you for half a century in retirement.
Anticipated Healthcare Needs
This goes hand-in-hand with your life expectancy, but they’re not the same thing. Your healthcare needs could include things like retirement home costs, but they also include things like physiotherapy, and massages, and prescription drugs.
While your employer may have covered many of these things while you were working, these expenses are all out-of-pocket once you’re retired, and you need to make sure you account for that in your budget. It’s so easy to overlook this one, especially if you’re healthy as a horse, because nobody wants to think about becoming older and more fragile… but healthcare needs can represent a meaningful chunk of your monthly expenses later on in life.
If health issues run in your family, and you think it’s likely you’ll have them too, then your budget needs go up, in which case $2 million may not be enough.
Whether You Have a Mortgage
Will you still be making mortgage payments in retirement? If so, your monthly expenses will be much higher than if you were mortgage-free, which will impact how far $2 million will get you. With the average mortgage payment hitting nearly $2,000 a month as of earlier this year according to this article from MoneySense, that’s $24,000 a year you can’t be spending on yourself.
How Your Money is Invested
Speaking of investing your money, the rate of return you earn makes a huge difference to the lifestyle you can lead with $2 million in retirement. If you were to try to live off only the dividends or interest your investment provides, then a 4% annual return would give you $80,000 a year to work with. Not bad for one person, but that’s tight for a couple. And again, inflation will eat away at that buying power if you don’t set aside some money to grow your savings.
If you were to earn 6% in retirement (which would involve investing in some riskier assets, by the way), that income goes from $80,000 to $120,000, which is a healthy income to work with. That said, that’s a tough results to achieve consistently in retirement, and you can be thrown off by bad investing years, as I’ll get to in a moment!
Sequencing of Returns
Equity markets go up and down, and they tend to do so in cycles. The wild thing is that the order this happens in when you retire can have a MASSIVE impact on whether you have enough money to get through retirement with.
I wrote a previous article that gets into this in more detail, but for our purposes here, we’ll leave it at this: if you retire with $2 million in the bank right before the markets tank, you’re going to struggle a lot more than if you retired with $2 million right as the market hits rock bottom and starts to rebound.
Wrapping it Up
While it’s true that it’s impossible to say for sure whether $2 million is enough for a couple to retire on in Canada, my personal feeling is that it’s a dicey proposition for all but the most frugal retirees, or those with shorter time horizons in retirement (say, those retiring in their 70s or later). If you’re single with that much in the bank though, you’re probably in the clear. One thing is for sure: $2 million sure isn’t the guaranteed ticket to retirement that it used to be!
