Pattie's Blog: How to afford your retirement
A man looks over a brochure offering various retirement savings options in Montreal, Friday, Feb. 3, 2012. (Ryan Remiorz / THE CANADIAN PRESS)
If you haven't thought about retirement -- you should!
Here is a reality -- the majority of us are going to retire someday. If you are in your late 30s, 40s or 50s and you haven't thought about retirement, you need to.
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How much you actually need in retirement will be driven by your lifestyle decisions. You need to be realistic. People will often say they want to travel in retirement and I will ask them, "do you travel a lot now?" and the typical answer is NO. What often happens is people tend to live a very similar lifestyle in retirement as they enjoyed prior to retirement.
I realize there will be some who retire the traditional way, others who will phase in their retirement and some who never plan to retire. In a perfect world this would be your decision and not driven by your financial situation. We could spend 20 to 30 years in retirement and no one wants to run out of money. This is where I'm always extremely cautious -- I've planned my retirement as if I'm going to live to 100 because what if I live too darn long? The fear of outliving my money can be scary and a risk I'm not willing to take.
How much do you need?
I would begin by using 70 per cent of your pre-retirement income, the income you were earning while you were working as a starting point. However, as I mentioned the amount you need will depend on your lifestyle and some may only need 50 per cent for a modest and comfortable retirement, while others may need 100 per cent. It is your retirement and that is why you need your plan and not a cookie cutter approach. Typically you begin to think about these numbers seriously about 10 years out.
For a quick back of the envelop calculation I'll use the Russell Retirement Rule of 20. Basically: Every $20 of retirement savings can generate $1 of retirement income per year, adjusted for inflation.
Here is a simple example of how it works:
Age 65 and earning $60,000 per year
- 70% of earned income = $42,000 per year
- Government benefits approx. $12,000
- Shortfall of $30,000 per year
According to the Retirement Rule of 20: you will need $600,000 to fund $30,000 a year in retirement.
Now before you panic, this money doesn't have to come from one source. You have government programs, possibly pension income, and the money you have saved in your RRSP's, TFSA's and non-registered savings.
It is important to know how much you will be spending in retirement and where your money will be coming from in retirement to determine if there is a gap. If by chance there is a shortfall, you have some tough decisions to make. You can save more today, spend less in retirement, invest more in the equity market, downsize your home, explore a reverse mortgage to see if it is for you and even consider part-time work. You do have options.
If you look up retirement in the dictionary it means to disappear and become reclusive. Wow, no one wants to do that in retirement. To ensure that doesn't happen to you need to know your numbers, and you can start with the calculators and tools we have provided.
Pattie Lovett-Reid is the host of The Pattie Lovett-Reid Show which airs on CTV News Channel at 8 p.m. ET on Thursdays. You can also interact with Pattie directly during Lunch With Pattie, a livechat that begins at 12:30 p.m. ET on Thursdays at CTVNews.ca/askpattiePattie Lovett-Reid