After all of our stressing over saving enough for our retirement, we now see that we will require less because we based our expenses upon our current circumstances. As in our case, you may have all you really need to retire and here’s why.
For starters, the financial industry constantly tells us we aren’t saving enough for life after work and that we probably won’t be able to afford to leave when it’s time to go.
Meanwhile banks and brokers bombard us with ballpark figures and random percentages of how much of our current income we must squirrel away in order to retire comfortably — or at all.
“I have a real problem with the idea that you need to have 70 per cent (of pre-retirement income) or a million dollars to retire. It’s a load of hooey,” says financial wellness expert Frank Wiginton.
“Everybody will have a different type of retirement in mind, so that type of thinking just keeps you chained to your desk longer,” says Wiginton, who runs financial planning workshops and coaches people in the workplace who are ready to make the leap out the door.
More than 1,000 Canadians are reaching retirement age every day, and will do so for roughly the next 20 years. While millions of North American baby boomers are retired or contemplating retirement, many others are putting it off, figuring they can’t fund it or would just rather continue working while they’re still healthy.
Sixty per cent of employees say personal financial well-being is their number one source of stress, contributing to higher instances of sick leave and lower productivity. And retirement is the granddaddy of all issues they must tackle, he says.
But fear not. Recent studies like one from Sun Life Financial show retirement is less challenging than many Canadians fear — and more affordable than we’ve been led to believe.
“When people are preparing for retirement, what are they experiencing? They’re stressed, they’re confused and probably a bit intimidated by it. They’re looking for solutions to help them get prepared, and reduce their anxiety,” says Wiginton.
“But people want to get excited. And they should,” he adds.
“People who are retiring – I call it changing gears – are usually significantly better off (financially) than they realize,” agrees William Jack, who is also an independent retirement counselor.
Jack says it’s amazing how many clients think they will have to work forever to afford retirement.
“The most rewarding part of my job is telling people they are on the right track and significantly better off than they realize,” he says.
Wiginton has worked out a table showing how much you will need to save to generate a given amount of income for a given amount of years at a given rate of return.
In other words, how much it will cost to retire.
The main thing he drives home is that retirement income should not be based on pre-retirement income but rather on your retirement expenses. So the money you need to save is the difference between your known income after retirement and your annual amount of spending while in retirement.
“The single biggest thing is: how much am I spending to be able to live – and pay attention to lifestyle (including entertainment, travel and personal care). That’s why I believe it’s critical that each person take the time to determine what their lifestyle plans are, and do a little research to determine what the cost of that lifestyle may be in retirement,” he notes.
And he acknowledges that it’s very difficult to wrap your head around a solid plan for how to live the next chapter of your life – let alone how much money you will need to finance it – on your own.
Wiginton’s chart shows the amount needed to fund your retirement, with or without a company pension. It also applies to couples and single people.
Say you will need your savings to generate $30,000 a year for 30 years and you estimate you will be able to get an average 4 per cent rate of return, which is a conservative estimate. You would need $518,760 in personal savings.
Don’t think you’ll live that long – maybe only 20 years after your career ends – but expect to live a little larger? You’ll have to sock away more: about $679,500 according to Wiginton’s table.
Nearly half of Canadian workers do not have a company pension, so with less coming in as retirement income, a larger amount of money will be needed.
“If you don’t have a pension then you will need, say, $20,000 more to fund retirement, so you would look to the chart amount that’s $20,000 higher,” he says.
While rare today given the scarcity of gold-plated pension plans, he has some clients who don’t need to save anything beyond what their pension will provide because it will pay them more than they are likely to spend in retirement.
Some may have lavish plans and goals for retirement, like purchasing a property in a warmer climate or buying a sweet ride and driving across the country. Others may wish to join expensive golf clubs and travel the world, so they may require much more income post-retirement than they did pre-retirement.
“Until you clearly define what it is you want to do, it is very difficult to determine exactly how much money you will need,” he said.
According to the chart, you wouldn’t need $1 million in savings to retire, unless you expect to live 45 years after you leave your job.
One big caveat: you can do all the planning in the world but can never prepare for major life events such as illness, marital breakups and big expenses like the roof literally caving in on your house – all of which throw the financial plan out of whack.
Charting your course.
To illustrate how to use the chart, Wiginton, 42, uses himself as an example:
We plan to retire when I am 60 years old and live to be 95.
1. We will travel regularly, sail a boat, volunteer in my community and spend time with my family.
2. This will cost us about $100,000 a year.
3. We currently spend $156,000 a year.
4. We will no longer be paying for a mortgage, life insurance, daycare or retirement saving. This will reduce our spending by $80,000 ($18,000 mortgage, $25,000 life insurance, $12,000 day care, $25,000 retirement savings). We will increase our spending by $15,000 for travel and $15,000 for boat operations.
5. Once we are over 80 we will reduce the travel and boating significantly. (This should offset the increase in cost of living for our entire retirement period.)
6. We will have gross income of $70,000 coming from company pension, CPP, OAS. After tax this would be about $60,000.
7. $100,000 – $60,000 = $40,000
8. Live for 35 years in retirement
9. Table says I need to save $746,000 (based on a 4 per cent average annual rate of return)
Additional retirement income.
Many people look at their pension statements or their RRSP savings and think there is insufficient money there to enable them to retire.
Wiginton points out seven common sources of retirement income outside a pension to keep in mind:
CPP could add up to $11,000 a year in income;
Old Age Security could give you another $6,000 a year;
If you have money saved in an RRSP, it might generate another $5,000-$10,000 a year in income, maybe more depending on how much you socked away;
Tax free savings accounts provide tax-free income throughout retirement;
Non-registered savings accounts;
Inheritance. People often don’t wish to include this in their planning, but it is definitely a source of assets that would help;
Real estate options including a reverse mortgage, downsizing or selling off your property completely.
You get used to living on less.
A recent study of both working Canadians and recent retirees found Canadian retirees “are in a pretty good place,” says Kevin Press, assistant vice-president, market insights at Sun Life Financial.