Client resource: Planning for the next stage of life requires answers to some important questions
How much should you save for retirement?
That’s a question on many people’s minds these days as they navigate the pandemic. Many who have been putting off the decision for awhile are rethinking it. Others are moving up their timeline.
Here are five steps to help you consider how you’ll finance this phase of your life.
- Set your retirement goals
How much you need to save depends on several factors – when you retire and what you plan to do.
Do you want to retire at 50 or 70? How long does your family tend to live?
People used to plan to live into their 90s, but more now are living until 100 (or more). So, talk to your financial advisor about your dreams and possible lifespan, and how much money you need to cover it. If you want to retire at 50, but may live to 100, do you have enough to cover it? Or do you have to work longer?
Also consider your retirement lifestyle.
Do you just want to putter around the house? Is you mortgage paid? And how long do you think you can live there before you may need more care or support? That may depend on health – but it can quicky deteriorate as you age. So, plan conservatively for what could be your worst-case scenario, so you have the finances to cover it.
You may, however, have more ambitious plans – such as building your dream house, travelling to all the places on your bucket list, or returning to school. If that’s the case you, you’ll need more to cover those expenses – so figure out the cost.
Also consider what debts you have, where you want to live, and whether you have to support children and grandchildren.
Then, think about the daily lifestyle you want when you retire. You’ll need to consider yours, and your spouse’s, retirement plans and health as well as your hobbies and what they cost. Also look at your living expenses and what might change. You might not be driving to work, but you may have more health costs as you age. Look at what you’ll get from your pensions – both company and government. Also consider what you have in your personal savings and investments.
It’s a lot to figure out, but now is the time to see if your dream retirement lines up with your financial reality. Have you enough to cover 30 or 50 years? Be honest – and start looking at how you can adjust now. Can you save more – or start cutting expenses? Work with your advisor to look at every aspect, so you can prepare for the most realistic picture.
- Decide when to start saving for retirement
Ideally, you should start saving in your 20s, when you leave school and start earning an income because the earlier you start to save, the more your money can grow. That’s called compounding, and it can make a huge difference.
For instance, if you start saving $3,000 a year in a registered retirement plan at age 25 and do that for ten years – and never save another dime, but can earn a 7% annual return on what you saved – then the $30,000 you’ve saved and invested in those ten years can grow to more than $338,000 by the time you’re 65. If you don’t start saving $3,000 a year until you’re 35 and save that until you’re 65, your $90,000 in savings will only grow to $303,000 if you can get the same return. That’s a big difference.
If you didn’t start saving early, start now so you can begin to accumulate some retirement savings.
- Decide how to save for retirement
You can save money in registered retirement plans, which allow you to defer the taxes on the money you have until you begin to withdraw it for retirement. That’s a big advantage to help you save more.
You can also save money in your company pension plan if you have one. You can often take contributions with you if you change jobs, too.
But, the most important thing is to talk to your advisor. Figure out how much you’ll need to save and then the best vehicle to do that. Your financial advisor may have a lot of experience in this area, so harvest that wisdom and guidance to help you.
- Consider your rule of thumb
As you can see, deciding how much you’ll need for how long is not easy, so many people have different rules of thumb. Some say save “as much as you can”. Others say start saving in your 20s and save 10 to 15% of your income. Some say save 70% of your pre-retirement yearly salary to live comfortably or 100% if you have build, travel, or return to school.
So, work with your financial advisor and figure out all the answers for steps 1 to 3). The more precise you can be, the better your financial advisor can help to determine what “rule of thumb” will best work for you, given your age and stage.
- Consider the impact of inflation on pensions and savings
Inflation is the rising cost of consumer goods and services, and it’s measured by the consumer price index (CPI). It’s high right now – with some projecting it may be 3.5 to 4% in 2022 rather than the more standard 2%.
It can erode your money, so you need to calculate how it’s going to impact both your income and expenses.
The benefits you get from government pension plans – such as the Old Age Security (OAS) and Canada Pension Plan – are indexed to help with your cost-of-living inflation, but not all employer pensions are. So, check with your employer or pension plan administrator as to whether yours is. Then work with your financial advisor to ensure that you’re covering this cost. Your advisor can guide you to a safer future by recommending how to invest to cover this and your other expenses.