Focus on Your Retirement Life – Not Just the Numbers
All too often retirement planning is based on cookie-cutter assumptions – you have to save 25 times your desired income, or $1 Million , or you need 70% of your current income to live comfortably.
If you go to the personal finance section of your newspaper or any financial site, you’ll see countless articles and posts that start with the question “How much do I need?”
According to a poll of Canadians, the magic number for retirement savings is $756,000.
But a realistic retirement plan doesn’t start with a number and work backwards. It doesn’t make sense to focus on the money part if you haven’t considered the living part.
Figure out what your future will look like
Figure out what you want your life to look like in the future.
You don’t have to know exactly what you plan to do the day after you stop working. In the book Designing Your Life there is a worksheet you can use to draw out many versions of your 30 or so years of retirement in five-year increments.
One version could be if money were no object. Another, what you would do if money were tight. Or how about a version of being free to do whatever you want regardless of what others might think.
The goal is to think about all the different ways you could live a fulfilling retirement life.
Do you imagine your life continuing on just the way it is now except with an older body and fewer kids around?
Or do you hope for something radically different?
If your dream involves sitting on your porch surrounded by waist-high piles of books and sipping margaritas and little else, your future spending plan will look radically different from the person who wants to visit every continent in luxurious style, or someone who want to start a business.
The next step to building a real retirement plan is to figure out exactly how much you’re spending and on what. How does money flow into and out of your hands? The success of your financial plan is entirely dependent on how well you manage your income and expenses. If this sounds suspiciously like budgeting – you’re right!
Realize that you’re probably going to have to make some changes to your spending if you want to reach any of your goals and live the life you want rather than working until you drop. Keep spending within your means and work on eliminating your debts.
What will you be spending your money on when you’re retired and reading on the porch, or a wealthy world traveller?
Your goal is to come up with the amount of money that will reasonably cover your expenses in retirement based on your real life – not on statistically unlikely “rules of thumb.”
Related: 5 Myths About Retirement Planning
The good news is it’s fairly easy to find income information.
- Canada Pension Plan. You can find your Statement of CPP contributions online in your My Service Canada Account. Based on the amount of your eligible earnings since you turned 18 and the actual money you’ve contributed, you can get an estimate of what your pension would be if you were 65 (or 60, or 70) today.
- Old Age Security. You will receive the maximum if you have, or will have, lived in Canada for 40 years after you turned 18. Otherwise the amount will be prorated.
- Employer pension. If you have a defined benefit or contribution pension plan through your employer, you receive a statement every year which tells you exactly when you’re eligible to retire and with how much.
Some questions to ask yourself
- When do you think is a good time to retire? Are there some work projects you want to finish first? A mortgage or other debt you want to pay off? Some big expenses you want to have cash on hand for?
- If you have a pension, what do you know about the various components – bridge benefit, lifetime benefit, supplementary benefit, survivor benefit? Can you decipher the statement and retirement paperwork? Does your employer have tools to help you understand it or have seminars run by the pension administrators where you can ask questions? Will your work benefits continue to pay for your glasses and dental work?
- Have you considered how your retirement date and the date you begin pension benefits could impact your payments?
- Are you retiring with someone? Have you compared your ideal retirement life to theirs? How will each of your financial resources impact your income? Find some common ground and get your goals aligned.
- What are you worried about? What steps do you need to take now to alleviate your fears?
Brainstorm some solutions
Start with what you think makes the most sense to you. Maybe you want to start CPP as soon as you retire and wait to withdraw from your RRSP until you are required to. Or, you intend to draw from your RRSP right away and delay government benefits until you’re 70. Perhaps you’ll buy an annuity as soon as you retire and never have to think about your portfolio again.
Make a list of all your income streams and the different ways you can access them – there are many ways to fund retirement and a lot of choices to make. Narrow them down by examining what is actually possible.
There is no single right way to do this. There is only the right way for you.
This is where spending some time with retirement calculators or, even better, financial planning software can be really useful. You will be able to stress test your retirement income plan and see how combining your ingredients in new ways can give you a better chance of avoiding things going horrible wrong.
The bottom line
If all this soul searching and calculating seems overwhelming – it shouldn’t be. Starting with the specifics of you and testing and recalibrating is a lot better than simply using generalities or rules of thumb.
Don’t obsess about numbers. Regardless of how many times you check your math, you ultimately have to make important decisions. Since you don’t have a crystal ball that will tell you the future, you can only make the best choices in areas you can control.
“If you don’t know where you’re going, you will probably end up somewhere else.”