Ever worry that you’re not saving enough for retirement? Did the recent financial crisis make you wonder if you’ll ever be able to retire at all?
MoneySense magazine has a simple message for you: Relax. Preparing for retirement doesn’t need to be stressful. The trick is to have a plan.
So where do you begin? Do you really need to amass a million-dollar nest egg as many people insist? We’ve found a smarter way to discover how much you’ll need to retire.
Six easy steps
1. Calculate your must-haves
There are the things you’ll want in retirement, and then there’s the things you’ll need. Start with the things you’ll need—and you’ll find they probably cost a lot less than you thought. Think about it: One you’re retired, your mortgage is likely paid off, and there will be no more child care or tuition payments. Plus you won’t have to save for retirement any more, and you can probably get by on one car. Most middle-class couples are happy to discover that they can cover their must-have list with just $30,000 to $40,000 a year in after-tax income.
2. Calculate your nice-to-haves
Dreaming of a round-the-world cruise or winters down south playing golf? Such activities must be planned and budgeted for. Keep in mind though, that one-time splurges, or even a busy travel schedule all the way through your 60s, will not be a regular expense forever. You’ll naturally spend less on such pursuits when you reach your late 70s, so you may be able to afford more than you think in your early golden years.
3. Count on government
Ignore the naysayers regarding the Canada Pension Plan and Old Age Security. Both are in good shape and will be there for you when you need it, to a maximum of $16,000 a year per person, depending on your situation and how long each of you paid into CPP. A couple receiving the full amount wouldn’t need much from their corporate pensions or savings to supplement this.
4. Factor in pensions and RRSPs
Got a defined benefit pension at work? Congratulations! Your retirement planning just got a lot easier, as you can count on a set amount of income every month. It may be a good idea to continue contributing to your RRSPs as a hedge against inflation, but this will likely become your nice-to-have budget.
5. Get a handle on risk
For those without a defined benefit pension—or those with a sizable amount invested in equities—the name of the game is risk management. You should have a diversified portfolio with 30% to 50% of its assets in various fixed-income investments (such as bonds and GICs), and the remainder in a mix of Canadian and international stocks. (See our Couch Potato strategy on MoneySense.ca for more on this.)
6. Balance the present and future
Your nice-to-have budget is better spent during your early retirement years, as you’ll be more active then. If you build a fortress around the must-have component of your portfolio, you can treat the nice-to-have with more freedom. If you reach 85 and your nice-to-have budget is almost tapped out, you’re still in good shape. You used it properly and got the maximum value from it.
You can get a more comprehensive outline of these steps—plus a decade-by-decade list of tips and priorities—by picking up the MoneySense Guide to Retiring Wealthy. It features 130 pages of proven advice delivered in a straightforward manner—all of it backed up by the editors of Canada’s most-read personal finance magazine.