A Simple Way to Plan Your Retirement Needs
June 6th, 2017
Every now and then, it’s a good idea to review your savings plans, pension plans and investments and reassure yourself that you are still on track for retirement and comfortable with your financial direction.
You may even want to adjust your expectations, change your expected lifestyle plans and take into account changes in your personal situation.
In any event, the prime goal is to determine how much money you are going to want to have available when you retire.
Calculating how much you need is never easy. Your needs depend on several factors, including how long you will live and the lifestyle you expect to maintain. But an estimate is essential to help you guide your finances.
So to start your calculations, you need to make a few general assumptions: you retire at 65, will live to be 90, and will life to be 90; earn an average of eight per cent before inflation on your investments and inflation will run at a four per cent pace a year.
The general rule of thumb is to put aside enough to match two-thirds to 70 per cent of your current income. Let’s say you are a typical family that, according to Statistics Canada, has two working spouses earning $70,814 a year before taxes. That means you need approximately $50,000 of annual retirement income.
Let’s also say you and your spouse or common law partner have no company pension plan but will receive a combined $30,000 a year from the Canada Pension Plan and Old Age Security, you still need $20,000 a year. Some experts suggest you will need savings equal to 15 times that amount — in addition to CPP and OAS — or a nest egg of $300,000. But be careful, at that rate, you would be out of money at age 90.
To get on track toward your goals, a few uncomplicated calculations can give you a rough estimate of your financial needs, where the money will come from, and whether you are on track:
Add up your OAS and CPP payments: The Old Age Security monthly benefit is taxable income and you may have to pay back some of all of your payments, depending on your retirement income level.
You can start receiving your Canada Pension Plan benefits as early as age 60 — when it will be 30 per cent less than at age 65 — or as late as age 70. Your benefit depends on how long and how much you contributed to the plan. You can estimate your CPP retirement pension by referring to the annual Statement of Contributions you receive.
Compute additional income: Other income sources can include investment property rentals, part-time work, annuities, savings plans, GICs, inheritances, benefits from having lived and worked outside Canada, dividend income and, of course, your Registered Retirement Savings Plan. When estimating your RRSP investment returns, it’s more realistic to project a seven per cent or eight per cent annual return than the 11.5 per cent that many Canadians expect. And remember that by the end of the year in which you turn 71, you must convert your RRSP into a form of retirement income. The most common is the Registered Retirement Income Fund (RRIF), which requires you to withdraw a federally set minimum each year.
Account for inflation: On average, inflation reduces the buying power of a dollar by at least four per cent every year. Over 20 years and the value of today’s dollar is cut in half. So, if you needed $50,000 a year now to live in retirement, that will double in 20 years.
Remember taxes: Much of your retirement savings are tax deferred, but when you take retirement, you can expect a larger than usual tax bill for the first year because little or no tax is withheld from your new sources of income. For the rest, you are likely to be in a lower tax bracket, but your income is still taxable.
Calculate miscellaneous expenses: Travel and leisure spending are likely to increase, while commuting and clothing costs will decline. Your public health insurance will only pay for essential or medically necessary services so you should calculate the costs of insuring ambulance services, prescription drugs, dental care, glasses and contact lenses. In some cases provinces pay for some non-medical services, sometimes sharing the cost with you. Other expenses to consider are housing, life or disability insurance premiums, education expenses for children or grandchildren, pets, charitable donations, and accountants, lawyers and other professionals.
Remember, these calculations give you only a rough estimate of your needs. It’s a good idea to consult an expert for a detailed projection to ensure your retirement years are really golden.
In times of mergers or downsizing, early retirement may be forced on you. This requires consideration of severance packages and termination rights.
You are entitled to a period of notice or an amount of money to take it’s place. The details can be obtained from the province’s ministry of labour. Larger companies may be required to give longer notification periods, help employees find new employment or find solutions that would keep the employees working.
You may be entitled to a lump sum payment and the monetary value of saved-up sick days may also be added. Instances where you would not be entitled to severance include:
Right to Recall
Once you accept a severance you lose the right to be recalled by your employer.
You can be paid a lump sum or by installments over no longer than three years, depositing money into various investments such as mutual funds. In some cases, you can transfer money to an RRSP.
Based on a formula, the Income Tax Act allows a portion or all of a Retiring Allowance payment, specifically paid to you in recognition of many years of service, to be deposited directly to an RRSP. If some money must be taken in cash, you can contribute to your RRSP or a spousal RRSP if there is contribution room.