Life Changes That Can Affect Your Retirement Income
Retirement planning is all about making adjustments. Life is unpredictable, and chances are the retirement plan you make at age 30 will look nothing like your reality at age 60. Here are some factors that will make you need to revisit your retirement calculations
- Significant changes in your income, such as landing a higher-paying job or launching a new business.
- Large changes in your asset value. Real estate is a good example of this anyone who owned a property in Toronto or Vancouver in the last decade has seen enormous gains in their assets. Albertans have not been as fortunate.
- Investment gains and losses.
- Health issues that can cause a change in your life expectancy.
- Changes in family life such as getting married, having children, or getting divorced.
Gather Your Financial Documents
These documents are needed to calculate what your assets are and what you may need to save for retirement:
- Pension plan paperwork, if any
- Bank account statements including savings and chequing accounts
- Registered Retirement Savings Plan statements, if any
- TaxFree Savings Account statements, if any
- Other investment statements such as bonds, stocks, mutual funds
- Tax returns issued by Canada Revenue Agency for the last six years or for however long you have been working if less than six years
Figure Out What You Already Have
Take stock of all the money and assets that you have saved. If youre just starting and you dont have much, thats fine. But understand what you do have so that you can build off it and make it work for you.
Sometimes people overlook money that they have saved in a previous employers 401. If you have money in a 401 account that you no longer use, consider an IRA rollover. You can usually transfer the money into your current employers 401 without having to pay any taxes or fees. You could also open an IRA and transfer the money into that account. Either way, dont lose progress youve already made toward your retirement plan.
Look over any investments you have and make sure they align with your retirement goals. If you plan to retire in 10 years, you probably dont want all of your savings invested in high-risk stocks. Though it depends on your plan. Maybe you do have some savings that you want to invest in higher-risk stocks. And if you arent sure how to allocate your investments, you should consider getting the help of a financial advisor.
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How Much Do I Need To Retire In Canada
Perhaps the most asked question by prospective retirees is: âhow much income do I need to retire?â
While I have previously answered this question in the article on retirement income calculation, I will summarize it again below.
The retirement savings you need depends on the lifestyle you plan for retirement, how long you expect to live, whether you will continue to work part-time, the government benefits you qualify for, and more.
The most popular strategy for calculating your retirement income needs is referred to as the 4% withdrawal rule. Basically, this rule assumes that you should have a 25x multiple of your annual retirement spending saved away.
For example, if you plan to spend $40,000 per year in retirement, your retirement pot should hold $1 million today.
There are various other rules, but nothing is set in store. What works for you may not work for someone else.
Also, we have not taken into consideration the government benefits and pensions you will receive. You can deduct these from your total annual income needs and calculate a 25 Ã multiple for the rest.
Plan To Keep Earning Income
Early retirement is not about stopping to work, but rather gaining complete control of your time, says Northrup. He suggests that after investors leave the 9-to-5 grind, they find part-time or gig economy work that fits with their new lifestyle while offering a modest income to offset living expenses. These jobs may even offer benefits, like health insurance, that can help bridge you to retirement.
By planning to continue earning income, you are able to achieve early retirement far earlier because you dont need as much money saved up in investments to support your lifestyle, he says.
During your retirement planning phase, think about the kind of work youd find rewarding during retirement. Take time to research your options. Knowing that you have options for retirement income can help alleviate concerns that you might outlive your savings or any feelings of discomfort from the thought of actually spending the savings youve accumulated over a lifetime.
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Learn Your Retirement Type
When its decades away, retirement is hard to really visualize. You put your head down and work and sock away as much as you can, knowing it will help build a nice nest egg for when youre done your working life. But what if youre following someone elses plan and not the one for you? Experts say a little self understanding today can lead to fewer surprises when you meet the future you. Find out if youre a Continuer, an Involved Spectator or an Easy Glider.
Make A Date With Your 401 Plan And Ira Once Or Twice A Year
- Review your asset allocation plan. Your retirement accounts should match your risk tolerance and goals. Brush up on asset classes and whats in your retirement plan to better understand your options.
- Check your progress. Are you saving more? If not, consider changing your deferral, adding money to your IRA, or making a catch-up contribution.
- Update beneficiaries on your accounts and keep your contact information current. If you have retirement accounts with Principal, you can log in to make those changes.
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Choice #: Take The Cash
Taking the cash is known as the commuted value. Youre able to move the money out of the company pension plan so it can be self-managed by you.
Your employer cuts 2 cheques to you, one is locked in pension money, the other is cash.
Watch out for the government tax grab, but beyond that, this is your money. Use it for retirement or to pay off your mortgage or buy a boat or RV. Take a trip. The rest is your estate.
Keep in mind that if you choose this option, youll want to make sure to contact a financial planner to help you invest your funds so that youll have enough money to last you for the rest of your life. We can help. Call us to speak with a pension expert at 1-888-554-6661.
There are other things to consider when moving your pension away from your employer, such as using your Locked-in Retirement Account . Learn more here.
How To Start Saving For Retirement
While starting early is always important even $25 a month in your 20s is helpful it’s OK to set money aside for more immediate needs first and then start tackling retirement in your late 30s and early 40s. However, you don’t want to wait much beyond that because you’ll need time to put money into a retirement account for that money to grow. The longer you wait the more you’ll have to sock away yearly making the challenge a lot more difficult.
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Create A List Of Important Documents
A personal inventory of essential documents will be a useful reference for yourself, and it will help your loved ones if theres ever a time when they need to access the information. Heres some of what you might include, and you can access our template to help you get started.
- List of insurance policies and contact information
- List of investment, retirement and bank accounts, with all contact information
- List of debt obligations, due dates, and contact information
- Location of relevant documents
- List of doctors and contact information
- List of medications and contact information
- List of all pharmacies that you use
- Location of safety deposit box keys
- Location of your original Social Insurance Number card
Average Canadian Retirement Expenses
Lets start with how much the average Canadian spends during retirement. The 2017 Survey of Household Spending by Stats Canada found that the average spending per household for Canadians over the age of 65 was $60,359 per year .
If you assume that you and your partner will retire at age 65 and live until age 82, this will work out to be $1,026,103 total spent during retirement.
Note that these are average numbers, and yours could be much higher or lower. This is just a good starting point. Lets dig a little deeper now:
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How To Retire At 70
If you’re still working at 70, you may be the type who never wants to retire. Plenty of people continue working in their golden years, simply because they can, and they prefer to stay active.
If you do want to retire at 70, the good news is that you’ll get the maximum amount of Social Security benefits by waiting until you’re 70 to start payments.
There’s more good news: Like wine, some retirement products get better with age. Annuities and reverse mortgages are two products that are more attractive in your later years, because a reduced time frame works in your favor when calculating costs and interest rates.
From age 70, you’ll also need to keep in mind the minimum distribution limits on your retirement accounts. Many plans require withdrawals by 72 for those who turned 70 1/2 after December 31, 2019. If you miss these, there is a hefty penalty, so make sure you start them on time.
Lastly, although it applies to people of all ages, when you’re in your 70s , you should make sure that all your affairs are in order: If you haven’t done so yet, review all of your accounts and policies for beneficiary designations, create an advanced directive, and take care of estate planning.
Group Registered Retirement Savings Plan
A Group Registered Retirement Savings Plan is similar to a RRSP, except its sponsored by your employer. Often, your employer will match your contributions , and contributions are taken directly from your paycheck.
If your employer offers a match, always take the match! You dont want to leave money sitting on the table.
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Here Are Some Ways You Can Receive Retirement Income From Insurance Policies:
- Term life insurance if someone you know who has passed away has named you as a beneficiary
- Whole life or Universal Life Insurance There is an investment component to these policies, and you can draw out an income as you get older. Its also good for bypassing probate laws and setting up inheritances.
- Critical Illness Insurance You can get income from a policy such as this if you suffer from something like a stroke or heart attack. Its usually given as a lump sum payment.
- Disability Insurance If you arent able to work due to a disability, you can qualify for these monthly payments if you have the proper insurance in place.
Think About Withdrawing Money Early From Your Rrsp
Logic would suggest you should want to hold money in your RRSP for as long as you can, to allow it to grow without being taxed. But the looming conversion of your RRSP into an RRIF at the age of 71 can change your strategy, says Jonathan Chevreau, Retired Money columnist at MoneySense. When you are forced to convert an RRSP into a RRIF, that means your income is going to rise. Depending on your financial picture, that extra income on top of your pension means you may face a clawback of your Old Age Security.
Knowing that situation will arise when you turn 71, you may want to start pulling money out of your RRSP in your early 60s or whenever you have retired. That way, although you will have to declare the withdrawal as income, you might be able to pay tax on it at a lower rate than you would when youre 71 and earning more. Plus, you may be able to structure your OAS to start later so that you can withdraw more of your RRSP and avoid the clawback.
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Questions To Ask Yourself Before Retiring
As you plan, consider these important questions:
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At what age do you plan to retire?
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Can you participate in an employer’s retirement savings plan? This includes 401 plans and traditional pension plans.
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If you have a spouse or partner, will they retire when you do?
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Where do you plan to live when you retire? Will you downsize, rent, or own your home?
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Do you expect to work part-time?
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Will you have the same medical insurance you had while working? Will your insurance coverage change?
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Do you want to travel or pursue a costly, new hobby?
Why Should You Plan For Retirement
Good news! People on average are living longer and are able to remain healthy and active well into their sunset years.
But many Americans havent saved or invested enough money to retire in their 60s with the confidence that their funds will last. Both the Center for Retirement Research at Boston College and the Consumer Financial Protection Bureau have estimated that approximately 50% of today’s retirees have cut back on their spending, or will be forced to do so, due to dwindling resources.
Far too many retirees end up relying on Social Security to cover the majority of their living expenses only to find out the hard way that it isn’t nearly enough. Social Security retirement income is only designed to replace about 40% of the average worker’s salary, but more than one in five married couples and 45% of single retirees depend on Social Security for more than 90% of their incomes in retirement.
The bottom line is that, while many get by without ever making and executing a retirement plan, those who most enjoy their retirement do so in part due to having a retirement plan. Retirement planning is what can help you to be financially comfortable after you leave your job.
Social Security is only designed to replace about 40% of the average worker’s salary after they retire. Many retirees drastically downgrade their lifestyles due to inadequate savings.
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Understand Your Time Horizon
Your current age and expected retirement age create the initial groundwork of an effective retirement strategy. The longer the time from today to retirement, the higher the level of risk that your portfolio can withstand. If youre young and have 30-plus years until retirement, you should have the majority of your assets in riskier investments, such as stocks. There will be volatility, but stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is long, meaning at least more than 10 years.
Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. Inflation is like an acorn. It starts out small, but given enough time, can turn into a mighty oak tree, says Chris Hammond, a Savannah, Tenn., financial advisor and founder of RetirementPlanningMadeEasy.com.
Weve all heardand wantcompound growth on our money, Hammond adds. Well, inflation is like compound anti-growth, as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesnt seem like much each year, but given enough time, it has a huge impact.
You might not think that saving a few bucks here and there in your 20s means much, but the power of compounding will make it worth much more by the time you need it.
Know The Numbers Ignore The Numbers
The world of retirement is full of very important-sounding numbers. Theyre useful in the broadest termssometimes just for their shock value. For instance, they can tell you if youre far behind in saving.
Theres no question that you need to know about stuff like the 4% rule or the 80% rule. The latter suggests your spending will decline by roughly one fifth in retirement compared to your final year of working.
Then theres the 25x rule: Multiply your annual budget amount by 25 and youll find the number you need to retire comfortably. Figure you spend around $75,000 every year? The 25x rule says youll need around $1.9 million saved before you retire.
Its good to calculate figures using these rules on the back of the proverbial envelope, to have a sense of whether youre on pace to have enough stowed away before you stop working. But you shouldnt get attached to these figures. Individual circumstances vary so much they arent always very useful when you make a real retirement plan.
The 4% rule is the most suspect number of all, since retirement-friendly investments like Treasury bonds are yielding so little these days. Meanwhile, low-income retirees often spend more than 80% of their working income in retirement. Those in good health entering retirement tend to spend less on health care during their golden years.
Get a high-level view of your retirement with these numerical guides, then move on and get more intimate with your own real-life situation.
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Decide How Youll Save And Invest
Putting your retirement money in the right place is just as important as knowing how much to save. Heres what we recommend:
- Save at least enough in your employer-sponsored account401, 403, 457 or Thrift Savings Planto get the full company match, if your employer offers one. If you have more than one 401, find out if a rollover is right for you.1
- Use a Health Savings Account Tooltip An account that lets you set aside tax-free dollars for qualified medical expenses. Most HSAs also let you invest your savings. To be eligible, you must be enrolled in a high deductible health plan . to put money away for future health care costs, if youre eligible.
- If youve maxed out your employer-sponsored account or dont have one, consider a traditional2 or Roth IRA3 to boost your savings.
- If youve maxed out your IRA,Tooltip Individual retirement accounts are personal retirement savings plans that have tax benefits. Most IRAs offer a choice of investments. Types of IRAs include traditional, Roth, rollover, education, SEP and SIMPLE . consider a brokerage account Tooltip A taxable account that you open with a brokerage firm. It allows you to invest in stocks, bonds, cash, ETFs, mutual funds and other investments. to save even more.
