Retirement savings - How do I make up for lost time?
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Saving for retirement is a long-term process. Whether you’re in the initial stages of retirement planning or retirement is fast approaching, many people find it difficult to save as much as they’d like - which may affect their retirement lifestyle goals.
In your twenties and thirties, there are often more immediate financial goals, like paying off student loans or saving for a house that may compete with your plans for, what seems like, a long-away retirement. Before you know it, you’re in your forties and retirement doesn’t seem so far away anymore.
Is it possible to make up for lost time? Fortunately, with a little planning and discipline, the answer is yes. If you haven’t given your retirement savings the attention it deserves in recent years, and want to ensure you’re on track to meet your financial and lifestyle goals for retirement, here are some strategies to consider:
Set your retirement income goal!
Different retirement lifestyles have different costs – so consider how you want to spend your retirement years and the type of lifestyle you want to lead. Then estimate an annual income amount you think you’ll need, in today’s dollars.
For example, in retirement you plan to take a vacation once a year. To determine how much you’ll need to save for your desired retirement lifestyle, start off by looking at what this would cost you in today dollars. Let’s then assume the inflation rate is 3% per year. After calculating what it would cost to travel today, the number of years you have until retirement and the inflation rate, you will have an estimate of how much you will need to save if you wanted to travel in retirement.
From that amount, you’ll likely be able to deduct some amounts you’ll receive from other sources. These might include:
- Government pensions.
The two main government pensions, the Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security, could provide you and your spouse with an estimated $15,000 each in retirement income per year.
- Employer defined benefit pension.
If you or your spouse are entitled to a benefit under a defined benefit pension plan, be sure to deduct the expected amount you’ll receive in retirement from your annual income requirement. If you’re not sure what dollar amount to expect from your pension plan, try deducting 30% from your estimated retirement income goal. Your pension plan administrator can also help you determine the amount of the pension you’ll receive in retirement or refer to your annual Defined Benefit statement for this information.
Once your expected income from other sources has been deducted, you’ll be left with the retirement income you must generate from your group plan and personal savings.
Determine your savings gap
To determine if there is a gap in your current level of savings, choose Financial Calculators from the left side navigation bar on the www.sunlife.ca home page and select the Retirement Savings Calculator.
The Retirement Savings Calculator can take you through an easy step-by-step calculation to estimate how much you’ll need to save to achieve your retirement income goals. It’s also a good idea to contact a financial planner to help you determine your potential gap.
If the amount you’re currently saving is less than you’ll need to fund your desired retirement income, you will have a gap between the income you need in retirement, and the income you’re able to generate.
Here are some ways that you can make up for lost time and bridge your income gap in retirement.
- Increase your savings. Not surprisingly, the most effective way of bridging your income gap is by increasing your current level of savings. Whether it’s through your group plan, pension plan or personal savings, increasing the amount you save on a regular basis will make a significant difference in retirement.
- Consider more aggressive investments. It is important that you revisit your investor risk profile periodically as your life circumstance may change. If you started off as a conservative investor, investing mainly in bonds and GICs, inflation may be eroding the returns you’re earning. While inflation effects all investments, the effect can be more visible on your GIC and bond fund earnings. While adding equities and higher-yield bonds to your retirement savings plan may increase your short-term investment risk, it may also increase your potential returns over the long-term.
- Delay retirement. If you’re worried about a retirement income gap, one of the best ways to bridge it is to delay retirement. Every year you delay retirement is one less year you have to fund with retirement income, and one more year you can delay receiving your CPP/QPP benefits, to avoid the benefit reduction that occurs if you start receiving your CPP benefit before age 65. You may also be able to increase the value of your employer pension by working longer.
- Work part-time in retirement. Even modest levels of income from employment can make a significant difference in bridging the gap between the retirement income you need and the income you’re able to generate. Aside from the financial benefit, working part-time can also help bridge the emotional challenge of adjusting to retirement.
If you have a general question or suggestion about this newsletter, please send an e-mail to can_pencontrol@sunlife.com or write to At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, 14th floor, Toronto, ON M5V 3C5.This bulletin has been created exclusively for you. It addresses issues to help you with your financial planning and investments.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies.
Last Update: January 2005
