Updated: Jul 3
“So, Glory…” Maria said. “I’m turning 60 next year, and I’m thinking of retiring in a few years. I’ll be able to take my teacher’s pension and I’ve got my RRSP. I’d like to do some traveling and be able to see my grandkids whenever I want. But I’m afraid. Can I retire?”
This is one of the most common questions I receive at Glory Gray Wealth Solutions: “Do I have enough money to retire?” Like most of life’s big questions, the answer is…(drumroll)
The question that Maria is really asking is, “Can I declare myself financially independent? Do I have the means to support my lifestyle for the rest of my life, only working if I want to, not because I have to?”
There are two questions she needs to answer first:
At what age does she want to become financially independent, and
How much will she spend every year once she gets there?
When Do You Want to Retire?
Baby Boomers are rewriting the rules of retirement. Gone are the days of sitting on the porch. Retirees are more likely to sit on non-profit boards and in kayaks.
I like to use the term “rewire” rather than retire. At the age of “rewirement,” you want to be in the financial position to work only if you want to. Some people enjoy employment or consulting well into their later years. Others can’t wait to get away from work. Let’s assume that, in Maria’s case, she wants to stop working completely at age 63, so she can be more available for her grandchildren.
How Much Will You Spend After Retirement?
Design Your Lifestyle
Imagine you are retired. You are free to spend your days as you wish. What will you do with your time? It can be a lot of fun to plan what you (or you and your partner) will do. If you’re looking for some ideas, check out this article.
Prepare a Spending Plan for Your First Year of Retirement
Now that Maria knows when she will be retiring, she can prepare her spending plan for her first year of retirement. But how can she estimate how much money she’ll need in the future?
Bill Morneau (Yes, THAT Bill Morneau) co-wrote a book with Actuary Fred Vettese called “The Real Retirement.” Their research debunked the myth that most Canadians need to create a retirement income that is 60% to 80% of the monthly income they earned when they were working. They found that most Canadians can maintain the same lifestyle with only half of the monthly income they earned when they were working.
Why? Consider these factors:
Like most Canadians, when Maria was working, she spent a lot of her earnings on expenses she won’t need in retirement. Long commutes, child rearing, (hockey camp, anyone?) work clothing and other business expenses, and more mouths to feed before they flee the nest. She also had a mortgage and higher income taxes, plus she’d been putting away savings for her eventual retirement. For most people, these expenses will go away or be greatly reduced after retirement.
Start With What You’re Spending Currently, Then Tweak
So, now that Maria knows what not to include in her retirement lifestyle spending plan, what expenses should she include? She should start by tracking her current expenses using a simple tool such as the Ontario Security Commission’s Get Smarter About Money budgeting tool. Then she can tweak expenses so they reflect what she thinks she’ll need during her first year of retirement.
For example, costs to commute to her job may go away but money spent on hobbies and travel may go up. Property taxes will stay the same until she’s 65, [ ] but she plans to have her mortgage paid off before she retires. Here’s a good article that can help Maria start reducing expenses as part of her pre-retirement plan.
Estimate Your Income Needs for the Rest of Retirement
Maria now has a spending plan for her first year of retirement. What about all the future years of retirement after her first year?
Research has found that expenses in our late 60’s are usually much higher than they are in our 80’s. In our 60’s and 70’s, we are traveling more, visiting grandchildren and checking off our bucket list as fast as we can. By the time we reach our 80’s, most people have “been there, done that,” and are content to stay at home more often. However, research shows that out-of-pocket health care costs go up in our 80’s and particularly in our 90’s.
Maria and I will discuss her health, travel plans, planned giving and other goals. Then, we’ll create a spending plan for each year of her retirement, accounting for these goals. We’ll also take into account variables such as inflation and longevity.
And, Finally….Do You Have Enough Money to Retire When You Want?
Maria now knows how much income she’ll need to last through her retirement. But, does she have enough savings to pay herself throughout retirement? We return to our calculators again, taking into consideration how much her investments are expected to earn.
These calculations are best left to a financial advisor who can take into consideration tax and inflation rates. However, if you want to estimate this amount for yourself, you can apply the 4% Rule.
The 4% Rule
People are often excited to tell you about the 22% return they got on a “hot stock tip.” What they don’t share is the 54% losses they experienced on similar “hot stock tips.” A continual return of 22% over the 30 to 40 years you will be retired is not sustainable and is unrealistic for most people. At least most people who treasure sleeping at night.
A better number to use in retirement is 4%. This is the realistic expected return that a portfolio consisting of half bonds and half stocks would produce over a 30 year period. The 4% rule says that if you can live off of the 4% you earn on your investments, you will never need to touch the money you saved and it will last your entire retirement and beyond.
So, if Maria knows that her expenses in retirement will be $4,000 per month, and government benefits plus her teacher’s pension will provide $2,500 of income each month, she needs to make up the $1,500 difference with her savings. That’s an annual amouint of $18,000.
$18,000 ÷ 4% = $450,000
So, as a simple rule of thumb, not taking into account the inflation, personal preferences, estate needs and taxes that a financial advisor would consider for her, Maria needs to have $450,000 saved in her RRSP in order to be able to support her lifestyle in retirement.
Knowledge Gives Peace of Mind
Whether or not you have plenty of savings to provide an income for yourself in retirement or you still have more saving to do, knowing where you stand can empower you to prepare for this exciting time of life.
This article was first published on www.GloryGray.com by Glory Gray.