How Do You Need To Retire

Retirement Planning And Inflation

How Much Do I Need to Retire? Retirement Planning 101

Inflation is the rising cost of consumer goods and services. In Canada it’s calculated using the consumer price index . TheCPI tracks how the price of more than 600 consumer goods and services purchased by Canadians changes over time.

In recent years, the average rate of inflation in Canada has been 2% per year. This means the cost of goods and services has been rising by 2% every year.

How To Get Retirement Ready

Open a retirement account. If you have access to a GRSP, you should at the very least contribute the amount of money your employer is willing to match. You should also open a RRSP if you don’t already have one. A RRSP is one of the most popular ways to save for retirement in Canada and it comes with nice tax benefits. Learn more about RRSPs and GRSPs.

Avoid paying high fees. Fees are like savings termites they’ll chew right through your savings. When you invest with Wealthsimple, we charge a 0.5% management fees when you invest up to $100,000 and 0.4% when you deposit more than $100,000. That’s significantly less than the 2% fees paid by traditional mutual fund investors in Canada.

Make smart moves. Begin saving for retirement as early as you can and take advantage of the power of compounding. Create a budget that includes retirement savings, learn how investing works, discover smart retirement strategies and understand what it takes to retire early.

Factors Help Determine The Answer To The Question Every Retiree Asks

by John Waggoner, AARP, Updated January 6, 2021

En español | Figuring out how much money you need to retire is like one of those word problems from high school that still haunts you. If X equals your spending in retirement, Y equals your rate of return and Z equals the number of years you will live, how much will you need to save, given that X, Y and Z are all unknowable?”

The retirement equation isn’t unsolvable, but it’s not a precise calculation, either. You’ll need to revisit your retirement formula once or twice a year to make sure it’s on track, and be prepared to make adjustments if it isn’t. Weigh these four factors to get a better handle on how much money you will need to retire.

Also Check: Nycers Tier 4 Early Retirement Penalty

Think Strategically About Pension And Social Security Benefits

For most retirees, Social Security and pensions are the two primary sources of regular income in retirement. You usually can collect these payments earlyat age 62 for Social Security and sometimes as early as age 55 with a pension. However, taking benefits early will mean that you get smaller monthly benefits for the rest of your life. That can matter to your bottom line, even if you expect Social Security to be merely the icing on your retirement cake.

On the Social Security website, you can find a projection of what your benefits would be if you were pushed to claim them several years early. But if you’re part of a two-income couple, you may want to make an appointment at a Social Security office or with a financial professional to weigh the potential options.

For example, when you die, your spouse is eligible to receive your monthly benefit if it’s higher than his or her own. But if you claim your benefits early, thus receiving a reduced amount, you’re likewise limiting your spouse’s potential survivor benefit.

If you have a pension, your employer’s pension administrator can help estimate your monthly pension payments at various ages. Once you have these estimates, you’ll have a good idea of how much monthly income you can count on at any given point in time.

Your Big Costs In Retirement

Think about any big costs that might be part of your retirement plans. For example:

paying off your mortgage

Source: ASFA, June quarter 2021

ASFA estimates that the lump sum needed at retirement to support a comfortable lifestyle is $640,000 for a couple and $545,000 for a single person. This assumes a partial Age Pension.

ASFA estimates that a modest lifestyle, which covers the basics, is mostly met by the Age Pension. They estimate the lump sum needed to support a modest lifestyle for a single or couple is $70,000.

Also Check: State Of Maryland Retirement Office

Meet With Your Investment Professional

Having an investment professional is like having a good coach. They give you a plan and motivate you to put it into action. Every single athleteeven the all-starsneeds a coach.

If you think youre ready to retire, its time to sit down and have a long talk with your investment professional. You need to make some game-time decisions that have a lot riding on them. Dont go it alone!

Here are some of the topics you should discuss:

The Boring Glory Of Index Funds

Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.

And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments

Rule : Desired Annual Retirement Income X 25

This rule follows the 4% withdrawal rate rule. They are pretty much the same, but this is easier to calculate for those who would rather not dabble in fractional math. It infers that in order to meet your income needs in retirement, you want to have at least 25 x your desired annual retirement income.

For example, say you estimate that your expenses per year in retirement are $40,000. You would be expected to save up a minimum of $1 million in retirement savings.

â $40,000 x 25 = $1,000,000

Factor No : How Much Can You Withdraw From Savings Each Year

How Much Do You Need to Retire?

A landmark 1998 study from Trinity College in Texas tried to find the most sustainable withdrawal rate from retirement savings accounts over various time periods. The study found that an investor with a portfolio of 50 percent stocks and 50 percent bonds could withdraw 4 percent of the portfolio in the first year and adjust the withdrawal amount by the rate of inflation each subsequent year with little danger of running out of money before dying.

For example, if you have $250,000 in savings, you could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years. Higher withdrawal rates starting above 7 percent annually greatly increased the odds that the portfolio would run out of money within 30 years.

More recent analyses of the 4 percent rule have suggested that you can improve on the Trinity results with a few simple adjustments not withdrawing money from your stock fund in a bear-market year, for example, or foregoing inflation raises for several years at a time. At least at first, however, it’s best to be conservative in withdrawals from your savings, if you can.

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Have A Plan For Health Care

Lets face it: Its not easy getting older. Our hips wear out, our backs ache, and everything just moves a little slower than it used to. The average couple who will retire this year will pay approximately $285,000 in health care costs throughout retirement.3 You know what that means? You need to have a plan for how youll pay for health care costs.

Your Desired Annual Retirement Income X 25

This rule is essentially another take on the Rule of 4%. The principles are similar, but this version simplifies the calculation of how much you need to save. It infers that to meet your retirement income needs, you must have at least 25 times your desired annual retirement income in your retirement nest egg.

For instance, if your desired retirement income is $50,000, you should save $1,250,000:

$50,000 x 25 = $1,250,000

How Much Should You Have Saved For Retirement Now

Not everyone is able to start saving at age 25, or consistently save 15% of their salary for retirement. If you start later in life, or save a bit less, you may have to work longer, cut more expenses, or contribute more of your money to retirement to make up for less time and compounding.

Regardless of when you start saving or how much youre able to put away, Fidelity offers some simple retirement savings guidelines by age to help you benchmark your retirement saving progress:

Age

These numbers may look intimidating, especially if youre behind on your retirement planning. But dont worry. There are ways to get your retirement savings on track. Keep reading, and well offer tips on strengthening your retirement game in each decade of your life.

For more on which accounts you should use to save for retirement, check out our guide to retirement accounts.

Determine Your Retirement Age

Deciding when you should retire can feel like a balancing act. If you retire too early, you may run out of money. If you delay retirement, you could miss out on other experiences such as traveling or spending time with family.

Yet, delaying retirement comes with financial perks. First, your monthly Social Security benefits increase the longer you wait. The maximum benefit caps out at age 70.

If youre lagging behind on savings and investments, delaying retirement lets you earn more money and contribute to your accounts longer. It also gives your money more time to enjoy the effect of compounding interest.

Finally, retiring later creates a shorter window to depend on your savings, reducing your longevity risk.

But life doesnt always go according to plan.

A 2019 study by the Society of Actuaries found a persistent difference between expectations about retirement age and the reality.

People tend to retire much earlier than they plan to. According to the study which surveyed more than 2,300 people age 45 to 80 pre-retirees plan to retire at a median age of 65.

In contrast, actual retirees reported leaving the workforce at a median age of 60. That number has held steady since 2013.

Income, gender and marital status didnt greatly impact median retirement age, the study found.

In addition to health limitations, finding and keeping a job can become more difficult as you age.

What Is The Average Canadian Retirement Income

Without statistical research on savings and pension plans, we need to go by the Canadian Pension Plan data. As such, the average Canadian Pension Plan retirement pension hovers around $8,500 per year.

In 2021, the average monthly payout for CPP is $736.58, whereas the maximum account that could be earned monthly is $1,203.75. To achieve the maximum, you need to meet the CPP criteria found here.

In the end, the average CPP is useful but not enough. Plan without it and use it as a buffer to your plan in case it doenst go according to plan.

Compare Your Current Spending With Expected Retirement Spending

Look at how much you spend now. Then, figure out how those expenses will change when you’re retired.

For example, you wont need to spend money on getting to work, but you might decide to spend more on hobbies or on travel.

You may save money by taking advantage of seniors discounts.

Low-fee bank accounts for seniors

Many financial institutions offer low-fee bank accounts for seniors. They usually offer these accounts to people 60 years old and older. Speak to somebody at your financial institution to find out if they have accounts for seniors.

Seniors who have a low income can get special no-cost bank accounts. Find out if you’re eligible to get a no-cost bank account.

Discounts on goods and services

Many businesses offer discounts to seniors on a wide range of goods and services including:

groceries or household supplies

Always ask about seniors discounts. It could save you money.

Basing Your Needs On Current Income

Using your current income isn’t helpful for people who are in the early stages of their careers. You’re likely earning an entry- or mid-level income in your field if you’re in your twenties or thirties. Your income might drop for a while if you make a career change. All this will affect your savings formula.

It becomes hard to project the amount you’ll need during your senior years if you’re unsure what your pre-retirement income is going to be over the years.

Every Income Stream Matters

Revealed: How much you need to retire in ONE SIMPLE FORMULA

You should diversify your investments and allocate a portion to fixed-income assets. Allocating a significant chunk of your capital to income-generating assets like dividend stocks also lets you enjoy higher returns.

Additionally, you can also leverage dividend reinvestment programs to buy more shares from your returns and compound your passive income streams.

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Don’t Forget About Health Insurance

Nobody wants to spend down a big chunk of their retirement savings on unanticipated healthcare costs in the years between early retirement and Medicare eligibility at age 65. If you lose your employer-sponsored health insurance, you’ll want to find some coverage until you can apply for Medicare.

Your options may include continuing employer-sponsored coverage through COBRA, insurance enrollment through the Health Insurance Marketplace at HealthCare.gov, or joining your spouse’s health insurance plan. You may also find discounted coverage through organizations you belong tofor example, the AARP.

Canadians: Do You Really Need $1 Million To Retire

With great income-producing stocks like Crombie REIT , you wont need $1 million to retire.

More on: CRR.UN

Weve all heard the talking heads on TV and read the articles in magazines. Without at least $1 million invested, were destined to live our golden years, struggling to afford even the basic necessities of life. Or so they say, anyway.

Ive always questioned this wisdom. There are several reasons why retired folks may end up needing less than they think.

Firstly, expenses will decrease. Youll no longer have an expensive commute to work or have to shell out for business casual clothes. And, perhaps most importantly, youll no longer have to save for retirement. That alone can easily put an extra $500 or $1,000 per month into your back pocket. The mortgage will likely be paid off by then, too.

Then theres the motivation of the pundits. These folks often work for mutual funds or banks, companies that have a vested interest in upping assets under management. Its good for business, after all. Yes, most people want to leave an inheritance. But its silly to save more than $1 million when less than that will do. That cash should be spent, not hoarded.

Many also forget about how much Canada Pension Plan and Old Age Security earnings will help the average person retire. The average Canadian couple can look forward to approximately $2,500 per month in payments from these two sources. Thats a great start right there.

Read Also: What Is The Best Way To Retire

How Much Money Do You Need To Retire At 55 In Canada

A growing number of people aim to retire at 55 years old. If youre planning on retiring early, you might already understand that you will need to set aside and accumulate a substantial amount of money to fund your retirement. The only question is: how much do you need to save to retire at 55 in Canada?

As much as it might disappoint you, theres no precise figure for how much you need to save by the age of 55 to enjoy complete financial freedom during retirement. The ideal retirement nest egg can be different for every individual based on their current lifestyle, income, age, and retirement goals.

You can use one of the many retirement calculators online to get an estimate of how much you should save for your retirement. There are also many rules of thumb to determine how much they need to save.

I will discuss some of the most popular rules of thumb below so you can choose the one that you feel is more viable for you.

How Much Do You Need To Retire On $5000 Per Month

In a previous post on my site, we discussed the desire to retire at age 55 with higher inflation. Ill link to that case study and others later on.

Since that post, some readers have asked and told me:

Inspired by more reader questions when it comes to early retirement this post is about how much do you need to retire on $5,000 per month.

Recommended Reading: How To Estimate Your Retirement Income

Commit To Living A Debt

You could follow every tip ever conceived for retiring early, but if you carry a significant amount of consumer debt, all will be for naught. Debt servicethat is, the high cost you pay to borrow moneyis like the Nosferatu of best laid early retirement plans. It will suck you dry of the money you absolutely need to be putting away towards your retirement. We’re not talking so much about mortgage interest, though there are rent-dont-buy evangelists who like to point out that the stock market provides returns that outpace those of real estate. The real enemies of your retirement plan are the various other forms of consumer debt, particularly credit card debt and car loans, which brings us to…