DO I HAVE ENOUGH MONEY TO RETIRE COMFORTABLY?
5 STEPS TO HELP YOU WORRY LESS ABOUT RETIREMENT
There are a lot of things on people’s minds these days. Whether it’s the current state of our public institutions, fear over the economy or just simple day-to-day issues like the affordability of food and shelter, Canadians are walking around with a lot of worries.
This is certainly not a new phenomenon. The Toronto Star recently published an article referencing a recent “worry” survey conducted by Public Square Research that opens the door to the typical issues people walk around worrying about. Having worked in financial services for many years, I was less than shocked when I read the results.
Among the top 3 things that keep Canadians up at night, retirement affordability ranks right near the top of the list. This definitely falls in the "no surprise" category for me, since I have countless interactions with clients answering questions surrounding this very topic. I also couldn’t help but notice that a majority of the issues people reported worrying about in the Public Square Research survey coincidentally revolve around money as well.
So I thought it would be useful to share some tips and tricks around successfully planning the most significant financial event in most people’s lifetime - retirement. Let’s explore the common question of “How much money do I need to retire?”
STEP #1 – YOUR LIFE, YOUR PLAN FOR RETIRING
To start, my first words of advice would be this – be cautious in accepting a “one-size-fits-all” approach to reviewing your own personal situation. I commonly come across individuals who make the mistake of listening to what a friend or family member has to say about a particular financial matter, and thinking that what is best for them is also appropriate for their own set of circumstances. Keep in mind your financial life is unique to you and should receive the individual attention it requires to make good quality decisions that properly fit your personal objectives. Avoid the water cooler chats at the office or job site as these are places rife with the sort of flawed financial advice you need to run the other way from.
STEP #2 – THE “GOLD STANDARD” OF RETIREMENT PLANNING
Now that you understand the importance of treating your own retirement plan with some personal consideration, let’s get back into your comfort zone for a moment. Because let’s face it, you likely have the same tendencies to want to do what others like you do as well. This is commonly called a “herd mentality”, as people are afraid to deviate too far away from the crowd. It’s not uncommon for me to get questions like, “Is this what others are doing?” or “Is this what most people in my situation would do?”
So before jumping into the more cerebral type issues that require the kind of careful self-reflection that cause most people to cringe and bite their upper lip, such as “You’re now retired – what does your day look like tomorrow?” Let’s start with a less daunting exercise such as trying to establish a baseline for what maintaining your current standard of living looks like in retirement or what I might call the retirement “gold standard”.
There are generally two ways that you could look at this. The simplest method would be to try and understand what you (and your spouse if you are married or live with a significant other) take home in “after-tax” earned income. The easiest place to find this information is on your income tax return. Since you’re filing your taxes once a year anyhow, why not try and get a good understanding of what that number is for you and your family the next time you’re completing your taxes.
Now that you know what your family “after-tax” income is, wipe the dust off that trusty calculator and complete this simple calculation:
(After tax income) x 75% = Retirement Income Need
Now, the other way that you could review what your current standard of living is would be to simply calculate what your month-to-month living expenses. This requires an in-depth review of your spending on all personal expenses. Consider trying this over a 2-month period by paying cash for as many items as possible and putting all the receipts into a jar or envelope. Once the 2 months are up, organize the expenses into categories and tally up the categories. Next, come up with a total amount of all expenses. Finally, now that you have an amount of “pre-retirement” expenses, make sure to sit down, either individually or with the help and support of your financial advisor, to discuss where you might experience reductions of expenses in retirement.
To assist you in this exercise, consider using the "Monthly Spending Planner" tool available on the Compass Wealth Partners website.
STEP #3 – THE “FRILLS” AND THE “DREAMS”
Now that you have a good handle on what it’s going to cost you to get by day-to-day in retirement, it’s now time to start considering and possibly discussing with your professional advisor those things you always dreamt of doing when finally retired. For many people, this includes travel or vacations to destinations that have always been on the bucket list. For others, this includes suitable retirement living arrangements or upgrades to the home. Whatever your retirement dreams may be, it is important to try and identify what they are and give yourself the opportunity to build these into your retirement plan before it is too late.
What are these dreams going to cost you in retirement? Make sure to come up with a realistic number and consider this within the overall cost structure of your retirement income needs. Will these expenses be monthly and recurring (such as a membership to a club) or are they more one-off in nature, such as the cost of an annual holiday? Whatever they may be, if these expenses are not typical to any of your pre-retirement expenses, make sure to include these costs on top of the day-to-day cost of living.
STEP #4 – THE IMPORTANCE OF INDEXATION
Your day-to-day costs are now fully understood and you’ve contemplated some of the things you always dreamed of doing in retirement. You’ve also fully tallied up the cost of these things and are ready to try and determine what kinds of assets you’ll need to support this lifestyle in retirement. But before you do so, make sure to fully consider the fact that you’re going to need a cost of living raise each and every year, the same way you did while you were in the workforce.
Fortunately, things like the Canada Pension Plan (CPP) and Old Age Security (OAS) are indexed already by the government. Also, if you’re collecting a pension from a defined benefit plan, you might also be receiving indexation on this pension. However, if you are responsible for either fully or partially designing your own retirement income stream (hopefully with the help of a professional), through RRSPs, TFSAs and/or other assets, you will want to consider giving yourself a periodic cost of living raise. The purpose of doing so is to keep pace with the fact that everything from gas to clothing to food will cost more and more as the years slip by – a phenomenon referred to as inflation.
Although an individual’s real inflation reality will differ from person to person, we can use historical rates of inflation as our guide and consider about 2% as a pretty close estimate of what you may consider as a reasonable rate of increase on an annual basis.
STEP #5 – FINALIZING HOW MUCH YOU NEED TO RETIRE
By now, you’ve done most of the hard work and have laboured over the arithmetic of what your retirement lifestyle is going to cost you. However, you’ve yet to answer the very question you so desperately sought in the first place: “How much do I need to retire?” If you’re still reading, you may be asking yourself, “I thought it was easier than this?” But don’t worry, you’re almost there.
To fully understand how much you need to retire, you really need to take a step back and make a list of all the assets you own that can reasonably produce an income or quickly be converted into cash. Examples of this would be company pensions, RRSPs, TFSAs, savings accounts, a business, GICs, real estate holdings (or rental properties), etc. These are just some of the typical assets Canadians own that are normally used to produce an income in retirement. Now that you’ve listed these assets, assign both a current value and reasonable (if not a little bit conservative) long-term rate of return expectation for each asset.
Next, make sure you get a good handle on any government pensions you are expecting to receive. You can do so by contacting the relevant government agencies directly to try and get an accurate understanding of what kind of income these pensions are expected to provide you in retirement. In the case of CPP, which is based on individual contributions, each person’s entitlement can vary quite significantly.
Finally, try and determine what your retirement time-horizon looks like. At what age do you plan to retire? How long do you think you’ll live? (If you don’t have a strong opinion on how long you’ll live, I suggest that you plan conservatively and expect you’ll live a long full life). As an example, let’s say I retire at age 65 and plan until my age 95, I would need to produce a retirement income stream for 30 years.
With all of the key variables now figured out, you can use this handy retirement calculator made available by the Canadian federal government to help understand if you have enough assets to support a sustainable retirement income. Simply follow the steps in the calculator and fill in all the variables that you’ve already figured out in the earlier steps noted in this article. If you notice that calculator produces a shortfall, feel free to play with some of the variables to come up with the right mix that will get you to the finish line.
Finding this exercise difficult? You’re not alone - most people do. Feel free to contact our office today to qualify for your FREE no obligation Retirement Planning Assessment or click here to book your FREE Assessment now.
Isaac Musial is Partner & Wealth Advisor at Compass Wealth Partners, a Durham Region based financial services company located in Oshawa, ON. The foregoing is for general information purposes only and is not intended to provide specific personalized advice including without limitation, financial, legal, accounting or tax advice.