According to the latest Life Expectancy Report shared by the Conference Board of Canada, Canadians born now are expected to live to age 81. Contrast that with someone born in 1961, who was expected to live only to the age of 71. Canadians are living longer, but will your retirement finances last as long as you need them to?
In this article, we will look at how much you need to retire, and some ways to make it last your lifetime.
How Much Income Will I Need to Retire Comfortably?
A good rule of thumb is that you generally need about 70% of your pre-retirement income to continue to live in the same economic circumstances you did while you were working. The Government of Canada has a an online calculator that can help you with this calculation.
Step 1-Tally all sources of income
Take an inventory of all the various sources of income you will have when you retire. This can include:
- Canadian Pension Plan (CPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS) payments. Your Service Canada account can provide an estimate of what your monthly payments will be
- Private employer pension plan payments
- Foreign pension payments for work done in another country. (You may also be eligible for a government pension from foreign countries in which you worked.)
- Investment income, including rental property income or withdrawals from Registered Retirement Savings Plans (RRSP), Registered Retirement Income Fund (RRIF) or annuity payments
- Your personal savings
Step 2-Tally your expenses
Now make a similar list of your monthly expenses:
- Food, accommodation, mortgage/rent, insurance and property taxes
- Utilities, cell or home phone (or both), cable, internet, home security, life and home insurance
- Medical costs, including prescriptions, dental and eyecare (many employer-sponsored health plans no longer offer benefits to retirees, so those costs could be new to you, and private health insurance can be expensive, especially if you have underlying health issues.)
- Vehicle costs, including lease or loan payments, maintenance, gas, insurance
- Entertainment or travel. If you like to take that trip away every year, you must factor those costs in, including travel insurance
- Expenses associated with a dependent adult, child or grandchild
- Clothing, pet costs, and other things you pay every month
- Include a contingency fund for unexpected illness, repairs or other expenses
Will I Have Enough?
Since 1994, the golden rule of financial planning has been to withdraw no more than 4% of your retirement savings in a year, to ensure that your principal plus investment earnings will last as long as you need it to. Now look at your sources of income. If you need $40,000 per year for all your expenses, you need to save $1,000,000 if you go by the 4% rule. This, of course, does not take into account CPP/OAS, but at the highest payments, the maximum you get per year is $19,299 for 2021 for CPP/OAS combined (although few people get the maximum). You still need to make up the rest.
Average Canadian Retiree Spending
A 2020 Toronto Star article by David Aston estimated a retired couple could live frugally on $44K a year, and an individual could manage on $33K. Middle of the road lifestyles would be $65K for couples and $43K for singles.
Tips to Make Your Retirement Savings Last
- Delay starting your CPP/OAS. You can delay your CPP/OAS until age 70. For every year you wait, the amount you receive will increase by 8.04% per year (or 42% total if you wait until 70.) Conversely, if you take it early, the payment is reduced by 7.2% per year, to a maximum of 36% if you take it at age 60.
- Work part-time. Do something fun, tap into your expertise and make a little extra money. Hire yourself back to your former employer as a consultant, on your terms and hours. Work in a craft store or library, teach computer skills to kids or seniors.
- Keep a realistic budget. This doesn’t mean cutting out your annual trip, but it might mean less dinners out so you can keep your budget in line.
- Add diversification to your portfolio. Private equity real estate investments provide the opportunity to diversify your portfolio, receive a regular income stream and see your investment appreciate over time. Equiton’s private real estate investment funds are registered funds eligible and provide regular and growing monthly cash distributions from investments in a diversified portfolio of residential and commercial real estate, development projects and financing.
Retirement planning can be overwhelming, but if you research your options and follow the tips above carefully, you will be in a better position to ensure your financial health throughout your retirement years.