Imagine how great it would be to know exactly how much money you’ll need to retire. What if you could calculate an amount, down to the dollar, that would definitely be enough for you to stop working and start doing whatever you want?
Needless to say, real life isn’t so simple, and circumstances either unforeseen or beyond your control typically impact how much you’ll need to withdraw from our savings in each year of retirement. Lifestyle matters, too: it’ll likely cost more to travel the world in your post-working years than it will to settle down somewhere and live a quieter life.
Of course, even if you could determine exactly how much to save for retirement, getting there is a whole other story. According to one survey, Canadians expect to need $1.7 million for a comfortable retirement, which is no small amount.
While most of us will never know with absolute certainty that we’ve saved enough to retire, it is possible to get a rough idea of what life will cost after you stop working. As for saving enough to reach your target, the main things to remember are getting started as soon as you can, being smart about investing, and staying focused on your financial goals.
Figuring out how much you need for retirement
The basic math on retirement isn’t too complicated. The first thing to do is figure out roughly how much you expect to need for annual living expenses. Next, multiply that amount by how many years you might reasonably expect to live. Be generous with your age guess – you may stick around longer than anticipated and won’t want to run low on income.
Ideally, you’ll be able to retire debt-free, meaning mortgage payments and other loans are a thing of the past. That could change, of course, if you plan to buy a new (or second) property.
While you should remember to account for some additional spending on health-related costs in your later years, bear in mind that you won’t have to sock away as much money (if any) for the future like you did in earlier decades.
Adding up income
You pay yourself from your own savings in retirement, but you’ll probably be getting some money, too, whether it’s from a work pension plan or government benefit payments.
By the time you stop working, you should have built up a nice nest egg inside your Registered Retirement Savings Plan (RRSP). In the year you turn 71, assuming you haven’t already done so, you’ll have to convert your RRSP into a Registered Retirement Income Fund (RRIF), which will pay you a fixed amount each year. If you’ve been a smart saver, you’ll also be able to withdraw funds to finance your retirement from a Tax Free Savings Account, or TFSA.
As mentioned, you can also expect to earn retirement income from your work pension plan, should you have one, plus the Canada Pension Plan and Old Age Security payments.
Use an online pension calculator to try and determine how much income you can expect to receive from all these sources, and see how your projected retirement income total compares to your projected cost of living. If it doesn’t look like you’ll be earning enough for the retirement you want, it’s time to start increasing savings or decreasing costs to make the numbers work.
Don’t wait to get started
Time is the most important element of any good retirement savings plan, because it lets you take advantage of the power of compounding interest to grow your money faster. The more you can stash away in your twenties and early thirties, the more likely you are to enjoy the payoff of that early saving in your sixties, seventies, and beyond. The longer you wait to start, however, the more you’ll have to save each year to reach your retirement savings goals.
Market investing beats savings accounts
It’s tough to finance a retirement simply by sticking your savings into a bank account, even one that pays high interest. While stock markets admittedly go up and down, they tend to rise steadily over the long term with annual growth that outpaces even the best returns available from high-interest savings accounts, especially when accounting for the impact of inflation on your future cost of living.
Stick with your plan, but stay flexible
You can help set yourself up for a safe and comfortable retirement by developing strong financial habits and sticking with them. Avoid debt (and interest charges) as much as you can, stick to a budget, and stay on top of your regular spending to make sure you don’t get into any difficulty. Put your money to work for you whenever and wherever you can, whether it’s investing in stocks and bonds, property, or elsewhere.
Finally, it can be helpful to maintain some flexibility with the timing of your retirement, and how you intend to spend it. Maybe you’ll lower your costs by relocating to a cheaper destination after you no longer have to commute to work. Or, if the stock market is performing poorly when you plan to retire, perhaps it’s wise to wait a little longer before quitting working. Conversely, a few years of good market performance might accelerate your plan a bit or open up new options. Being willing to embrace multiple outcomes can make life easier both now and in retirement.