How confident are you that you will be able to retire at 65? Or, will you be among the many Canadians nearing retirement age that feel they are not going to be able to retire at 65, but closer to 67, as Jacquie McNish, co-author of the book, “The Third Rail: Confronting our Pension Failures” has stated?
It’s amazing how many people are truly unprepared and have no clue how much they need to retire with and how to go about accomplishing it. The key is to figure out what you want to do in your retirement years and estimate how much that will cost you. Having a specific dollar amount will do you no good these days, as we are all living much longer than expected. So you need to determine how much you will need each year in your retirement years.
Maximizing Your Returns versus Risk Management
The younger you are and the earlier you start planning, the better your retirement plan will turn out. However, it’s important to note there is a key difference in how you invest your money for retirement savings.
You can either play the game of maximizing your returns or focus on risk management. Risk management involves balancing your money or portfolio so you can get the performance you want, while ensuring you have enough money to last you through retirement. If you focus on maximizing your returns, you could lose a hefty amount of money that could have been invested more wisely.
Many financial advisers will tell you that the younger you are that you have more room to take risks and try to maximize your return. You can invest more aggressively because you still have more money coming in to invest. History has proven that all stocks take a dive at some point, but many do recover.
Once you are near your retirement years, you don’t have the luxury of time to wait for a stock to recover, and even if they did, it may not be in the healthy place it once was. Protecting your money is more important the closer you are to retirement.
Understanding your Employers Pension Plan
Your employer may offer a pension plan, and that can greatly decrease how much you need to save on your own. There are two private plans an employer can offer. The defined benefit plan guarantees you a monthly-defined income based on a formula, which includes your job classification, how much you’ve earned, and how long you’ve worked for a company. Your employer pays into this fund.
The defined contribution plan is set up so that you and your employer contribute a defined amount to the pension plan. You can check in your pension plan booklet or with your plan administrator regarding the formula they will use to calculate your benefit amount. You can get a lot of important information from your pension statement as well.
Understanding Your Government Benefits
The government also has three key benefits to help Canadians retire. Depending on your current income, these may be a good guaranteed source of retirement income. However, these amounts are not enough to live on. These benefits are the Canada Pension Plan/Quebec Pension Plan (CPP/QPP), the Old Age Security (OAS), and the Guaranteed Income Supplement (GIS).
The CPP/QPP plan amounts are determined based on what you paid into the plan while you were working. You can apply once you are 59 and before you retire. You can receive monthly payments as early as your 60th birthday.
The OAS is Canada’s largest pension program and you must be 65 or older to receive payments. This is funded by the government and your payments depend on your prior income and residency. The Old Age Security pension and benefits chart can help you determine your monthly benefit amounts. The GIS is an additional benefit to the OAS and is for low income Canadians over the age of 65.
In fact, you can set 30 minutes aside, and use this helpful Canadian Retirement Income Calculator. Using this calculator, you can estimate how much you may receive during retirement calculating in the OAS, CPP/QPP, RRSP’s, your employer’s pension, and additional income sources. When in doubt, always use the lowest figures, as many Canadians will not reach the highest payout.
Calculate How Much You Have in Savings Now
Now, you want to look at how much you already have saved up. Check your savings and retirement accounts, as well as any cash in money market accounts. Any stable savings should be added into the current amount you have saved. This is not the area to calculate any investments, as they could decline any time.
What Are Your Current Spending Habits
Now let’s look at your current situation – your current spending habits. If you analyze how you spend your income now, you’ll have a good idea of what you need to sustain your retirement lifestyle. Most people, of course, want to at least maintain their current lifestyle, but more want to enhance it.
Make sure to jot down everything, even coffee runs. You want to list all expenses because it will help you answer how much you need to live month to month. So include the insurance on your home, utility expenses, repairs, memberships, and annual travel plans.
What Will Your Future Costs Include
Remember, as you get older there will be other expenses you are not currently dealing with. For instance, you may need to pay out of pocket for prescription and dental insurance. Calculate additional medication costs.
You may have added to your current expense list your home taxes, but you may want to adjust here for an increase. You may not be paying on your home, but you still have appliances to keep up, such as your furnace, your stove, refrigerator, or you may even need to get a new roof.
Also, consider all the free time you will have. You are retired, so what are your plans? Do you want to travel, golf, or purchase a sports car? Calculate all the new expenses in.
What Significant Changes Will You Make to Decrease Income Needed
Now comes the fun part. It’s time to drop some of your expenses. As you’ve worked hard all your life, when you retire there is a silver lining. Hopefully at this point:
- Your mortgage payments are eliminated.
- You no longer need to deal with your children’s education fees because they should be done with college by now.
- You have either eliminated or minimized any credit card debt.
- There is no longer a need for any major home repairs or additions.
- You are retired, so you don’t need to save money for retirement any longer.
- Your children are adults so they can take care of themselves.
- Your travel plans are cheaper because you receive senior discounts and can travel during non-peak travel times.
Also, remember that as a retiree, you no longer have to worry about higher income taxes to pay. You also do not have to worry about the cost associated with working, such as eating out for lunch, the purchase and upkeep of your work clothes, or the transportation costs.
If you’ve owned a large home, now that it’s just you and your spouse, you may want to downsize. This means you may be able to pull equity out of your home from the sale. You could move into a place that you enjoy and where the utility and maintenance costs are more affordable.
Other Things to Consider
In order to calculate what you need to retire, you must have the mindset. It’s hard to predict the future, but try to think about what you want for yourself realistically.
Do you plan to work part-time? Many retirees do. They find themselves unhappy leaving the workforce so soon and are not ready to leave it behind. If you are one of them, working part time or starting a business on the side will help you supplement your pension.
Sometimes you can’t plan on your own. If you are serious about a healthy financial future, set up an appointment with a financial adviser. They can help you draw up a sound plan and it is their job to stay neutral.
For instance, many people believe it’s best for them to stay in their current home. However, the numbers might not add up as feasible for the long run and selling your home may be their best option. You may not be willing to calculate your life expectancy. A financial adviser will give you a few numbers to work with, to help you adequately plan. They will put down realistic figures, no matter what.
Remember, it’s never too late or too early to start planning your retirement future. To be comfortable, you must have an idea of what to expect. This way, if it’s not favourable, you have time to do something about it. You may discover that you do not need that one million dollars to retire after all.
Elizabeth Lampman is a coffee-fuelled Mom of 2 girls and lives in Hamilton, Ontario. She enjoys travelling, developing easy recipes, crafting, taking on diy projects, travelling and saving money!