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First, the good news: the average life expectancy has been steadily increasing in Canada.
And the not so good news? Investors today need to plan for what will probably be a much longer retirement than their grandparents had.
For many Canadians, retirement income will need to last thirty years or more. And it will need to cover a variety of expenses.
So how do you know the amount you’ll need to get you through retirement? Let’s examine five important things to think about when answering that question.
1. Rethink the 70% rule
You’ve probably heard this number before: seventy percent. That’s the proportion of working income per year the average retiree is advised to aim for in retirement.
Where does that number come from? Think about what your financial situation will look like in your later years.
- Chances are, you will no longer carry a mortgage.
- Your kids won’t need you to cover the basics.
- You won’t have to pay for work-related expenses like commuting and restaurant lunches.
- Also, you’ll no longer be saving for retirement.
While knowing this is helpful, everyone’s reality is different. The number you are aiming for also depends on what you would like to do with your money.
- Do you want to travel as much as you can?
- Help your children with a down payment for a first home,
- or cover a grandchild’s college or university tuition.
Maybe you have more frugal plans. Remember, everyone is different.
While a Sun Life report stated that retirees are typically living on 62% of what they earned before retirement, those same people advised working Canadians to aim for 71% instead.
Not sure what those numbers mean for you?
A retirement savings calculator can help.
2. Consider all possible expenses of a long retirement
Chances are, you’ll spend less in retirement than you did during your working years. However, the nature of these expenses might be different. Especially if you live to be one hundred, or more!
Rising healthcare costs can take up an important chunk of your income, especially as you age.
For example, a retirement home facility can cost thousands of dollars per month. And that cost can rise with your need for part-time or full-time care in assisted living. Medication can also be costly, especially if you don’t have private health insurance to help pay for it.
You may want to stay in your home as long as possible. It might mean making changes to keep yourself safe as your mobility decreases. Things like ramps, handrails, wheelchair accessibility or home-care services can really add up.
Your retirement fund needs to be able to cover these additional costs.
3. Don’t forget about inflation!
Inflation is the rising cost of living over the years. A small number like 2% inflation might not sound like much. But over time, the rising cost of living can really dig into your retirement savings. That means you might need to save more than you think.
For example, let’s assume your retirement income goal is $80,000 a year. To have that same purchasing power in 20 years, you’ll have to have $118,000 a year.
To reduce the impact of inflation, some advisors recommend delaying annuity-type income streams until you’re closer to 70 years old. These are income sources like your employer pension, Canada Pension Plan and Old Age Security. Of course, this depends on having access to personal savings to cover costs until then.
4. Rely on experts to tend to your retirement savings
Making sure your money lasts as long as you need it is complex. Thankfully, the right investment professionals assisting you may make things easier.
An advisor can help you build a financial plan over years and even decades until you retire. And when life changes, your plan should change too.
- If you still have 10 to 15 years until retirement, you will likely focus on saving and building wealth.
- If you’re nearing retirement, you may be more concerned with preserving the wealth you have.
Don’t have an advisor?
An accountant can help maximize tax efficiencies. No one likes paying more tax than they need to. And being tax efficient can help preserve your wealth and maximize your income potential.
5. Make sure your money is still growing through retirement.
Once you retire, you want to think about how you’ll replace your paycheque. In other words, how you’ll pay yourself through your investments. This usually means staying invested even after you’ve stopped working.
Money that still has potential to grow can help protect you against inflation. It can also help your money last well into your golden years and beyond.
How do you help make that happen? By planning your retirement portfolio with both income and protection.
Guaranteed products like segregated funds and annuities can be interesting pieces of your overall retirement income puzzle. They provide some peace of mind during volatile markets and when interest rates are low.
Remember, retirement is what you make of it. And it’s never too early or too late to invest in your financial future.
A Sun Life advisor can help you plan to build an overall retirement income plan that is tailored to your needs. There is no cost to talk to an advisor. Find an advisor.
- How much does it cost to retire in Canada?
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- When should you start CPP/QPP and OAS benefits?
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.