How much is enough? That's a question that's asked often. Everyone measures the concept of "enough" differently. Some of us think in terms of dollars per month or year:
- $50,000 per year
- $5,000 per month
Or, you may think of a percentage of pre-retirement income - 70-85%.
Many want to know what the "average" Canadian needs, or what "most" people require.
The proper question is, "What is enough for me?"
If you are retired, or close to it, I'm going to give you an assignment (should you wish to accept it). Spend some serious time with this. You are going to make three budgets.
Budget #1
The first budget details all your basic expenses - rent or mortgage payment, utilities, food, taxes, insurance, etc. Don't forget clothing, haircuts, what constitutes basic entertainment for you (meaning you will not give it up). Just look at your statements and receipts if you're not sure, but most of you will have a pretty good idea of these expenses.
Don't forget to estimate things like future upgrades to your house - new roof or furnace - or a new vehicle.
Budget #2
This budget will detail your full and complete "wants" picture. I don't mean a, "If I win the lottery I'll have a house on every continent," scenario. What would be a fabulous, but believable, retirement life for you?
You may need to do a little bit of research here. Don't just say, "I want to travel," or, "I want to spend the winters in a warm climate." You need to be specific. "We will spend $20,000 on a big trip every year." "It will cost $xx for the annual membership and fees at Plaid Pants Golf Club."
How much will the fun stuff cost you?
What money will be available to you?
I know I said you'll be making 3 budgets, but we need to take a moment here to see where the money will come from.
Find out from Service Canada and your company Pension Benefits administrator (if applicable) what your projected monthly payments will be. The closer you are to receiving the benefits, the more accurate they will be.
The monthly shortfall will come from your savings. The greater your income requirement, the more will be drawn from your own resources. Financial advisers say that a withdrawal of 4% of your portfolio should be sustainable for life.
When you retire you need to combine cash flow from government pensions, employer pensions and your own portfolio to provide reliable, steady income that will meet your needs.
Budget #3
This is the final working budget. How does it look? Chances are you will have to make a few adjustments to make it work for you.
Ideally, the basic necessities will be covered by your guaranteed income.
If it looks as though you may be withdrawing too much investment income come up with a plan.
Before giving up on your plans for travel, hobbies, or other entertainment, see if you can modify your basics to ensure you have an ample amount to spend on "non-essentials." Can you make do with just one car? You may have more time now to comparison shop for groceries and household needs. Would it be practical to move to a smaller home? Can you do the house- and yard-work yourself instead of paying someone else to do it?
You get the idea.
Then revise your fun activities. You want more than a minimalist life, but may have to have less than the full-meal deal. How about taking a big trip every two or three years instead of every year? You could eat out less frequently. Maybe you don't need to provide a lavish gourmet smorgasbord every time you entertain.
Spend money on things that bring you pleasure and add some "juice" to your life, but be mindful of what you are spending. What would you be prepared to discard if you had to?
Time-lines
Retirement is not a one-time event. It can span thirty or forty years (or more). Life happens and adjustments have to be made to your income and spending.
Consider your time-line for revenues:
| 55 | 60 | 65 | 71 | 80 |
| Company pension plan payments | CPP reduced payments | OAS (GIS) | RRIF min. withdrawals | Annuity(?) |
People tend to spend more in the first few years of retirement while they are trying new things. They have endless lists of interest, hobbies and sports that they never had the chance to participate in while they were working. They then reduce spending once they've settled into their chosen lifestyle. Early years typically involve greater travel and sprucing up the family homestead. Later on they have few material wants, and travel and recreational expenses drop.
In later years, though, you may face higher costs for medical care and home support. Paying rent at a senior's residence (instead of being mortgage free) draws down capital.
Final thoughts
I know all this calculating can be tedious and time-consuming, but two pitfalls of going into retirement are:
- Failing to plan, and
- Underestimating expenses.
The greatest fear of retirees is outliving their money. Regularly adjusting your lifestyle and financial plan as you go will bring you greater peace of mind than just leaving it to chance.
"I have enjoyed greatly the second blooming after age 60 - suddenly you find that a whole new life has opened before you." - Agatha Christie (1890-1976)
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