Other Sources Of Retirement Income
Home Equity and Real Estate
For some people in certain scenarios, preexisting mortgages and ownership of real estate can be liquidated for disposable income during retirement through a reverse mortgage. A reverse mortgage is just as it is aptly named â a reversing of a mortgage where at the end , ownership of the house is transferred to whoever bought the reverse mortgage. In other words, retirees are paid to live in their homes until a fixed point in the future, where ownership of the home is finally transferred.
A common way to receive income in retirement is through the use of an annuity, which is a fixed sum of periodic cash flows typically distributed for the rest of an annuitant’s life. There are two types of annuities: immediate and deferred. Immediate annuities are upfront premiums paid which release payments from the principal starting as early as the next month. Deferred annuities are annuities with two phases. The first phase is the accumulation or deferral phase, during which a person contributes money to the account . The second phase is the distribution, or annuitization phase, during which a person will receive periodic payments until death. For more information, it may be worth checking out our Annuity Calculator or Annuity Payout Calculator to determine whether annuities could be a viable option for your retirement.
What If You Didn’t Save Enough
Many seniors who find they didn’t have enough saved for retirement are going into consulting or are working part time to help cover living costs & obtain employer-sponsored health insurance. Another option many seniors consider is a reverse mortgage, which allows them to tap the built up equity in their home tax-free while enabling them to remain living in the home.
Plan For Your Retirement
The emphasis is on “your” retirement here, because no 2 will look the same. You could take two 55-year-old women with the same job and even the same postal code, and their vision for this next chapter will probably be very different along with what they can actually afford. Thats because a range of factors from how much we have saved to how much we want to spend can all influence just how much money well need to retire. Ideally, comfortably as well!
Whether youre 25 or 55, it can be helpful to sit down and answer a few questions to help you clarify what retirement might look like to you. Heres what you should ask yourself and why that matters:
1) When do I want to retire?
Its just math: The later you retire from full time work, the longer you have to accumulate that retirement nest egg. You might want to retire at 55 like your parents did, but do you have their fantastic pension? Its also worth remembering that were living longer, so its possible you may have to make this amount last for several decades. Is this something you want?
2) Where would I like to live in retirement?
3) What will my expenses be?
4) What will my income be each month?
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How Much Should I Save Each Year For Retirement
Once you know how much you will need for your retirement overall, you need to determine how much to put aside each year for retirement. Since you will be able to use interest, you dont have to put aside the whole retirement amount, because you will be earning money on your savings.
A general rule of thumb is to put aside at least 10% of your income for retirement. However, if you are well into your working years, you may need to put aside more. If you are a high-income earner, you may also need to put aside more to ensure you maintain your lifestyle.
You will want to ask yourself a few questions:
- What are the savings or investment tools Im using?
- Does my employer match my contributions?
- How much time do I have before retirement?
In general, the younger you are, the less you will need to put aside because your money will have more time to grow. If you are using investments such as stocks, you may need to put aside less than if you were just saving and relying on savings account interest to grow your fund.
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How Long Will My Money Last Using The 4% Rule
One way to estimate how long your retirement savings will last is by using the four percent rule. This rule of thumb suggests that you can withdraw four percent of your retirement savings each year and still have enough money to last for 30 years.
For example, lets say you have $100,000 in retirement savings. Using the four percent rule, you could withdraw $4000 per year and still have enough money to last for 30 years.
Of course, this is just a general guideline your actual withdrawals will depend on factors such as your investment return, inflation, and how long you expect to live in retirement.
The 4% rule has recently been criticized for being too aggressive. Many experts now recommend using a withdrawal rate of three percent or less to make sure your retirement savings last as long as possible.
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How Much Savings Will You Need To Retire
Now let’s determine how much savings you’ll need to retire. After you’ve figured out how much income you’ll need to generate from your savings, the next step is to calculate how large your retirement nest egg needs to be for you to produce this much income in perpetuity.
So, if you have $1 million saved, you would take $40,000 out during your first year of retirement either in a lump sum or as a series of payments. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases.
The idea is that, if you follow this rule, you shouldn’t have to worry about running out of money in retirement. Specifically, the 4% rule is designed to make sure your money has a high probability of lasting for a minimum of 30 years.
To calculate a retirement savings target based on the 4% rule, you use the following formula:
We saw in the previous section that our couple would need $4,000 per month from their savings. So, in this case, they should aim for $1.2 million in retirement savings accounts, such as a 401 plan or individual retirement account , to provide $48,000 per year in sustainable retirement income.
How Can I Save Money By Switching To Wealthsimple Invest
We charge a fraction of the fees that traditional mutual fund investors pay. Our management fee is 0.5% , plus underlying fund fees of about 0.1%. The average mutual fund investor pays 2% in fees.
Our smart technology helps keep your portfolio on track with auto-deposits, automatic rebalancing, and dividend reinvesting. And, we have a team of experienced financial advisors available to answer your questions and provide advice – whenever you need it.
Note: the total savings above, calculates the what you’d save if you were investing with Wealthsimple Invest compared to a traditional mutual fund investor. We compare the growth of your current savings between now and your retirement based on the rate of return selected. All figures are for illustrative purposes only, actual results will vary and fees among other factors are subject to change.
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Top 3 Expenses During Retirement
- Housing accounted for 33.9% of annual expenses: This takes up a third of a retired persons annual expenditures, which amounts to an average of $17,472 per year. It includes mortgages or rental payments, property taxes, home insurance, as well as home maintenance and repairs.
- Transportation comprised 16% of annual expenses: While transportation costs may decrease when you retire, it still takes up a significant portion of your budget. On average, drivers aged 65 and up spent $2,282 on vehicle costs annually. This includes gas, maintenance, repairs, and car leases, which can actually be higher than medical expenses. In a report by Transportation for America, around 79% of seniors aged 65 and above lived in suburban and rural communities that depended on cars for mobility. Even the cost of public transportation will affect your retirement plan.
- Healthcare represented 13.14% of annual expenses: The report showed that older households spent an average of $6,833 on healthcare per year. This is higher compared to the national average for all households, which is $5,193 annually. A huge bulk of your healthcare spending will go to insurance, and the rest will go to actual medical services, healthcare supplies, and medicine. Again, expect your healthcare expenses to increase as you age.
How Long Will My Retirement Savings Last
The answer to this question depends on several factors, including how much money you have saved, how much you plan to spend during retirement, and what sort of investment return you can expect. However, some general rules of thumb can help you know how long your retirement savings might last.
As a general rule of thumb, most experts recommend that you plan to have enough retirement savings to cover at least three to five years of living expenses. This will help ensure you have a cushion in unexpected events, such as job loss or medical emergencies.
Another rule of thumb is to aim for a retirement savings goal of at least $500,000. This may seem like a lot of money, but remember that your retirement savings will need to last you for many years. If you start saving early and invest wisely, reaching this goal is achievable!
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How Much Can You Expect From Old Age Security
Old Age Security is intended to help support people age 65 and older. OAS amounts are not tied to employment instead, its tied to the amount of time you lived in Canada following your 18th birthday. Eligibility is generally determined by Canadian citizenship or legal residency status in Canada and the length of time in which you resided in the country . If you receive Old Age Security , the OAS repayment threshold is set at $81,761 for 2022, meaning your OAS will be reduced in 2022 if your taxable income is more than this amount. It is fully eliminated once you have taxable income over $133,141.
Because the amounts change quarterly, you should always check with the official website for the current OAS pension payments.
How Much Can You Expect From Cpp
In calculating your Canadian retirement income, you should first figure out what you can expect to receive from government programs, such as CPP and Old Age Security. While every persons circumstances are different, Services Canada releases the average CPP payment, maximum payment, and adjustment for inflation and cost of living annually to help Canadians better plan for retirement.
For the year 2021, the average CPP payment for new beneficiaries was $714.21 at age 65. The maximum payment is $1,203.75. The cost of living adjustment will increase payments by 2.7% in January 2022.
The Canada Pension Plan uses a Statement of Contributions to keep a record of your pensionable earnings and your contributions to the CPP. You can use My Service Canada Account or contact Canada Pension Plan to get a copy of your Statement of Contributions. Your statement shows your total CPP contributions for each year and the earnings on which your contributions are based. It also provides an estimate of what your pension or benefit would be if you and/or your family were eligible to receive it now. The Statement of Contributions can assist you in your retirement planning.
In part, the reason one of the first questions in our Retirement and Savings Tool is the age at which you hope to retire lies in the CPP payment calculation. Because the target age of retirement is 65, there are penalties for receiving payments early, and rewards for delaying them.
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Using This Retirement Calculator
First, enter your current age, income, savings balance and how much you save toward retirement each month. Thats enough to get a snapshot of where you stand.
Want to customize your results? Expanding the Optional settings lets you add what you expect to receive from Social Security , adjust your spending level in retirement, change your expected retirement age and more.
Hover over or tap on the color bars in your results panel to get further insight into where you stand.
You can adjust your inputs to see how various actions, like saving more or planning to retire later, might affect your retirement picture.
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Do You Expect To Have Other Forms Of Income In Retirement
You may have non-registered investments that can provide you with an income stream.
If you own properties that you rent or lease to others, or expect to receive payments from business investments, these could be additional forms of income that could potentially reduce the amount youd need to save for retirement.
Additionally, if you opened a registered retirement savings plan , you can convert it into an RRIF, purchase an annuity, or cash it in . These plans would help provide you with additional income.
Our Retirement and Savings Tool can help you determine how much income youll have in retirement based on your current savings and income estimations, and how much more you need to contribute to reach your goal.
You may use a Tax Free Savings Account to save money for retirement and withdraw money from this savings plan on a tax free basis. Income coming out of a Tax Free Savings Account is not counted as income for government income tested benefits and tax credits. For example, this means that this money does not impact the amount of income you may be eligible for under Old Age Security .
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Why Have You Set The Default Life Expectancy Of The Calculator To 95 Years
For starters, people are living longer. Even though the average life expectancy in Canada is 82 years, many people live past this. It’s better to have more money tucked away for retirement than to run out of savings. Extra savings can always be passed down to your beneficiaries. You can change the default life expectancy if you think you’ll live a longer or shorter life.
How Many Years Should Retirement Savings Last
Your retirement savings should last for as long as you need them. However, this isnt always possible. In reality, most people will need to rely on other sources of income at some point during retirement, such as part-time work or government benefits.
A few factors can impact how long your retirement savings will last. For example, if you plan to retire early, your savings will need to last for a more extended period of time than someone who retires later in life. Additionally, if you expect to have high medical expenses or want to travel extensively during retirement, your savings will also need to last for a more extended period of time.
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Do You Have A Pension
If your employer offers a pension plan, it may affect the amount you need to save for retirement. There are two different types of pension plans employers can offer: defined contribution and defined benefit.
Defined contribution pension plans involve setting an amount the employer and the employee agree to contribute each year, based on the employees annual earnings. This helps reduce the amount you need to contribute to your retirement savings because your employer is footing a portion of the bill. Upon retirement, the employee can transfer these funds into a registered retirement income fund , or purchase an annuity .
Defined benefit pension plans are structured differently, in that the employer agrees to pay the employee an annual amount after they retire. This amount depends on how long the employee worked, how much they were paid annually during that time and which earnings count towards the calculation.
Employers can set up a plan that stipulates how many years will be averaged into this pension amount some plans average the top three years of earnings, whereas others may average the last three years, regardless of whether those years were the highest earnings. The pension is then calculated based on the number of years worked and a percentage of that average.
Therefore, wed use the following equation: $65,000 x 1.2 x 40 = $31,200.
Winnie can expect $31,200 per year from her employers pension plan after retirement.
Save Up By Opening Your Retirement Account
Once you have a job, its ideal to open your own retirement account. One of the most popular options is the individual retirement account , which is set up independently from an employer. IRAs come in two major types, which is the traditional IRA and the Roth IRA. Next, your company might offer access to 401 retirement plans. Once you get this opportunity, start contributing to your 401 retirement plan.
Heres how common retirement accounts work:
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