What's this going to cost me? Calculate the price tag
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What's this going to cost me? Calculate the price tag of the retirement you imagine
Eventually it comes down to the price tag. Whether we’re dreaming about a new car or renovating the basement, we end up asking the question, "What’s this going to cost?"
This is also true of retirement planning, where - sooner or later - we must turn our vague ideas about the future into hard numbers, and ask the questions: what’s it going to cost, and can I afford it?
These are not easy questions to answer on your own - since there are many factors to consider. For example, what will all the items on your retirement wish list cost in 20 or 30 years, due to inflation? And, how long will you live (which affects how long your retirement savings must last)?
Fortunately, there are tools to help - or do the calculations for you - such as the Retirement planner tool for Sun Life Financial plan members at mysunlife.ca (more on this later).
A few rules of thumb
To make this complex matter clearer, financial planners offer 'rules of thumb' to help you estimate your retirement costs. For example, many analysts say that you should aim to receive between 60 and 80 per cent of your preretirement household income during your retirement years to keep a similar standard of living.
This estimate is based on the assumption that your household expenses will decrease. Hopefully you’ll have paid off your mortgage, your children will have finished school and left home, and you won't have daily employment costs like commuting. Your income tax should also fall substantially.
While that’s good news, there are other factors. For instance, if illness strikes, you may face increased medical or prescription expenses. Also, the estimated savings in living expenses, which enable you to live on 60-80 per cent of your income, usually assume a family has two children. If there are no children in your household, you won’t save the estimated annual child-raising expenses of $10,000-15,000. Also, these calculations often assume savings from 'economies of scale,' when a couple splits household expenses. Thus, if you are single, you might think that you need half the income that a couple requires. In fact, some experts suggest that you should estimate closer to the 80 per cent guideline to make up for the household expenses that a single person must manage on their own.
Government income sources help
If the idea of replacing 60 to 80 per cent of your working income sounds overwhelming, don’t lose heart. Many Canadians can expect to receive monthly income from government sources to supplement their retirement income. For example, if you’ve worked in Canada, you may be eligible to collect income from the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). Depending on your income, you may also receive Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) at age 65.
While the amounts vary, on average most Canadians who worked all their lives in Canada can expect to receive about $11,500 per year from government sources. See the sidebar for more information.
This is reassuring, since you likely won’t depend entirely on your personal savings and individual retirement plans to pay for your retirement lifestyle. That said, experts estimate that government sources may cover about 30-40 per cent of your retirement income needs. Your personal savings and investments are critical to make up the difference.
How 'average' are you?
The above table helps show what the typical Canadian retiree spends each year, but how 'average' are you?
To figure this out, it’s a good idea to prepare a household budget of your current expenses. This basic financial planning task will give you an idea of your current lifestyle costs.
You should also consider the lifestyle you hope to achieve in retirement, including the 'needs' and 'wants' that will make you comfortable. See the May 2011 issue of At A Glance, to help identify the components of your dream retirement, including travel, hobbies and other priorities.
Then, for each of the bigger items on your wish list, you should research the related costs. For example, if you dream of a winter home in Costa Rica, what will it cost to buy and maintain? And what other expenses will arise, like airline tickets and medical insurance?
On average, what will it cost?
While no two retirees will have the exact same expenses, it’s helpful to review Statistics Canada research on typical retiree spending. For example, they compiled helpful data about the average costs of Canadian households - including senior couples aged 65 and over during retirement. See the chart for highlights, including a few of the main expenses to consider.
Our Retirement planner helps with the math
A great way to start is to use the online tools available on mysunlife.ca. For example, the interactive Retirement planner helps answer how much will you need to live your retirement dream. It then helps formulate your retirement goal, and helps you create an action plan to meet it.
For example, in the my lifestyle module, you can select a lifestyle profile (with retirement income options between $25,000–$90,000), with a helpful description of the kind of activities a person could afford at each level. Or, you can input a customized profile, based on your own estimates.
Later on, the planning tool will determine if you are on track to achieve your chosen lifestyle profile, based on your saving habits to date and other factors.
If you have a general question or suggestion about this newsletter, please send an e-mail to email@example.com or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
This bulletin has been created exclusively for you. It addresses issues to help you with your financial planning and investments, and cannot be reproduced in whole or in part without the express permission of Sun Life Financial.
Group Retirement Services are provided by Sun Life Assurance Company of Canada,
a member of the Sun Life Financial group of companies.