By Janet Gray, BA, BAdmin, CFP™, CHS, EPC, CPCA
I am often asked, “Do I have enough to retire?” It’s an earnest question, asked by smart, educated people with good incomes, who want to be sure they are making good decisions about their future. They hear all sorts of mixed messages in the financial media, or maybe even from friends, about how much they need to retire. You need at least X amount of money saved, or you must have Y% of your pre-retirement income still coming in.
I call those sorts of statements or formulas top-down planning. With top-down planning you’re trying to meet an external expectation that has nothing to do with you and your needs. Top-down plans are the ones that make many people nervous and worried about the future.
I believe the way to create a personalized retirement plan that excites you rather than unnerves you, is through bottom-up planning. As you may have guessed, bottom-up planning is not about meeting an external expectation it’s about meeting your needs. And it begins by being very clear on your current expenses.
Once you know what your expenses are today, you can project into the future and imagine how those expenses may change. Which ones are likely to decrease (i.e. mortgage) and which may increase (i.e. travel). Once you have estimated your retirement expenses you look to see what your sources of income will be. You may have retirement income from company pensions, RRSPs, TFSAs, CPP and OAS. Perhaps you have investment properties.
Let’s look at an example
Susan and John (names have been changed for privacy) of London, Ontario are in their early 50’s and have a joint family income of $120,000 per year equating to take home pay of $82,620 or $6,885 monthly.
Each month that $6,885 covers a mortgage payment of $1,800, property taxes of $340, car loans that total $600, two children in university with costs of $1,000 month, and an additional $1,000 in RRSP contributions. What remains covers other fixed expenses, groceries and lifestyle costs.
They would like to retire at age 60, but they are willing to work until age 65 if need be. They have been hearing that they should have $2million in assets to provide income for their retirement. Neither have a pension, but they both contribute regularly to their RRSPs. Yet even though their RRSPs continue to grow, Susan and John worry that they won’t have enough to live on.
If we peer into their future we can fairly speculate that at retirement the tuition, car loans and mortgage expenses won’t be a factor, saving them $3,400 per month. Quite possibly those expenses will be a non-issue for a short period of time before retirement, and that amount could be available to top up their RRSPs or to use on other lifestyle expenses. We can also assume that at retirement they will no longer be making any RRSP contributions, which will mean a savings of $1,000 per month.
Of course we also need to consider where Susan and John’s expenses will increase. They would like to travel more than they do at present, and they also hope there will be grandchildren to enjoy spending money on. They also expect that their health care costs will go up.
When all is said and done, to enjoy the comfortable retirement lifestyle they envision the couple will need $4,000 per month (after taxes).
So what will their sources of income be?
At age 65 both of them can expect to receive the maximum CPP amount which is currently $1,065 per month (about $13,000 per year, $26,000 combined per year). Under the new rules for OAS they will qualify for the maximum of $570 per month at age 67 (close to $14,000 for the two of them combined per year from OAS). That makes their combined government pensions around $40,000 per year or about $32,000 after tax.
To meet their retirement goal of $4,000 per month ($48,000 per year) Susan and John will need to withdraw the additional funds from their RRSPs.
Currently they have $175,000 in their RRSPs and are saving an additional $1,000 per month. With a 5% rate of return their retirement savings will grow to $550,000 by age 65. This will be sufficient to meet their modest retirement lifestyle goals and allow them to live comfortably. In fact they could retire as early as age 63 based on these numbers.
The couple was pleasantly surprised that they were actually on track to meet their retirement goals, without needing that top-down planning number of $2,000,000! They are excited and motivated to possibly accelerate their retirement date by contributing more to their RRSPs once their mortgage is paid out.
If you find yourself wondering, “Will I have enough?” Take some time to look at your numbers. Where do you stand today? What will change (increase/decrease) in the future? How do you imagine spending your days? If there is a gap between the expenses you’ll have and the income that will be available to cover them, you can focus on finding ways to close the gap. Peace-of-mind comes from insight, understanding and making a plan.
- All numbers in current dollars.
- Retirement calculations have taken inflation of 2.0% into account.