As you start planning for
retirement, it’s important to know how much you will need to retire
comfortably. Although this is a basic question when planning for retirement, it
can be very difficult to accurately calculate how much you will need in 10, 20
or even 40 years.
As a starting point, here
are some factors that can affect how much you will need for your retirement.
Keep in mind this list is just a start.
Your retirement goals
Your retirement goals
could have a big impact on your spending habits and will form the basis of how
much you need to save. How do you picture your retirement? How will that change
over time?
· Do you plan on travelling more frequently?
· Do you want to retire earlier or later?
· Do you want to work in retirement?
· Do you want to start saving for a grandchild’s
education?
· Do you plan to move out of your home? Do you
plan to move to a different community?
· Do you plan to carry debt into your
retirement?
Current spending versus expected spending in
retirement
Your current financial
obligations are likely different than they will be when you retire. So how much
of your pre-retirement income will you need in retirement to maintain your
desired standard of living? 70%? 60%? 50%?
There is no golden rule
or set amount. The amount can vary greatly from person to person, since
everyone will have different retirement goals, different levels of income and
different attitudes about money. Some people might need less, while others
might need more.
To get a rough estimate
as to how much you will need, think about your retirement goals, how you spend
your money now and how you think you will spend it after you retire. For
example, whether you still have substantial debts such as a mortgage or an
outstanding loan, or downsizing your home, can have a significant impact on
your spending in retirement.
If you plan to move to
another province or out of Canada, look into how that might impact your medical
insurance, social benefits and taxes.
It is also important to
consider the effects
of inflation, which is the rising cost of consumer goods and services. You
should think about including a rough estimate of how much things will cost when
you retire using a historical average annual rate of inflation.
If your savings are not growing by at least
the rate of inflation (2.00% between 2000 and 2014), your savings can actually
decrease in value over time. To help you compare your current spending with
your expected spending in retirement, try FCAC’s Budget
Comparison Worksheet. Once you have an idea of what your future expenses
will be like, put those values in the Financial
Goal Calculator, to help you create a plan to save for your retirement.
How long do you expect to be retired?
Today’s retirement
landscape looks quite different than it did 30 or 40 years ago. The number of
years you can expect to live in retirement has increased: on average, a male aged
65 in 2013 can expect to live to 84 and a female aged 65 in 2013 can expect to
live to 87. Therefore, it is important to plan to save enough to support your
desired lifestyle throughout your retirement.
Deciding when to retire
is a major lifestyle and financial question, and the answer can have a big
impact on how much you’ll need to save for retirement. For example, if you
expect to live until you’re 90 and want to retire by 65, your retirement
savings will have to last at least 25 years, but they will have to last 30
years if you retire at 60. By working five years longer, you earn five years of
extra income and delay the need to access your retirement assets by five years
as well. The combined effect can be a significant help in achieving your
retirement goals.
Your retirement can
depend on several factors, including:
· your retirement goals (desired lifestyle)
· your partner’s retirement plans
· your health or a significant other’s health
· your current financial obligations and living
expenses
· how much you will get from private and public
pensions
· your current job as well as the availability
and suitability of other job opportunities
Unexpected events
When planning for your
retirement, you may wish to consider the possibility of unexpected events such
as:
· earlier than expected retirement for personal,
professional, or health reasons
· unexpected major expenses such as home
repairs, car maintenance, travel etc.
· health emergencies for yourself and/or a
significant other and the need for additional care this may cause.
It is important to
consider the impact of unexpected events on your retirement since they can
dramatically affect your finances. With this in mind, think about starting an
emergency fund for your retirement that will be larger than a typical emergency
fund (three to six months of income).
While unexpected events
will always be a surprise, planning what you will do in case they happen can
help lessen their impact. Consider setting up a specific banking or savings
account as an emergency fund and have a percentage of your pay automatically
deposited into the account.
You might also wish to
consider whether you have enough disability
or life insurance, and whether you will need to purchase additional
insurance coverage to reduce the risk and financial impact of for unexpected
events.
Long-term care
Many Canadians find it
difficult to think about the idea that they may need long-term
care in their retirement years. However, planning for the possibility of
long-term care is an important part of retirement planning. Depending on your
needs, long-term care can be very expensive, so it is important to get an idea
of how much it may cost and to plan accordingly.
Long-term care facilities
are governed by provincial and territorial legislation. Therefore, costs may
vary depending on where you live or where you decide to live. For additional
information about the potential costs of long-term care, please contact your provincial or
territorial government.
If available, consider
critical illness or long-term care insurance coverage which can help cover some
of the risk.
After carefully reviewing
your potential needs, set a goal and use FCAC’s Financial
Goal Calculator to help create a plan to get there.
The information above was from the government of Canada's web site on retirement planning found here
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