What to keep in mind when planning for your retirement
We’ve come a long way since Otto von Bismarck gave us the concept of retirement, and, perhaps more fascinatingly, the retirement age of 70. That was 1881, and more than a few things are very different today; life expectancies, salaries, and lifestyles to say the very least. Now, we have concepts like Freedom 55, or the F.I.R.E. movement that sees some frugal folks retiring as early as 30.
So how does one navigate the world of retirement savings in 2022 and beyond? We did some digging to find out.
Age – nothing but a number?
The first step to determining how much you’ll need to save for retirement is setting a timeline for yourself. Jackie Porter, Certified Financial Planner says, “We’re editing what it means to retire, based on the fact that people are living longer. We’re no longer in the Industrial Revolution where everyone was retiring from hard labour jobs … Now it’s about retiring when you’d like to retire and not because you have no choice.”
Clearly things have changed a lot since good ol’ Otto decided to give hardworking folks a reprieve. So how has the financial industry kept up? When most of us think of retirement, the perennial RSP springs to mind. While RSPs are a fantastic retirement savings tool, there are a lot more products and strategies you can use to your benefit, including, but not limited to: Canada Pension Plan (CPP), Old Age Security (OAS), Tax-Free Savings Accounts (TFSAs) and, possibly the most important, talking to a financial advisor.
When you start thinking about retirement, a litany of questions likely flood your mind. “When should you start saving?” is a big one. How many times have you heard something akin to the best time to start saving for retirement is in your 20s; the second-best time is right now. That’s a pithy anecdote, but it doesn’t really help you make a plan, does it? If you’re thinking about retirement (which, let’s face it, you are now) it’s likely a good time to start saving. How aggressively you’re saving depends on a multitude of factors. Your age now, the age you plan to retire, your assets, and what you plan to spend your retirement doing. If you can’t commit to saving a hefty amount now, start small. “A lot of people will say ‘Well what’s the point of saving $20 a month?’ The point is, it’s the habit, and no, it’s not a big deal, but you’re building the habit and one day it’s gonna be more,” says Wendy Brookhouse, Financial Advisor and Money Coach.
“There’s all these variables, but all need to be tested against what’s going to give you the most efficient and sustainable income over the time you’re in retirement. And I think sometimes we forget that it’s a long time. If you retire at 65, and you could live to 95-100. That’s a long period of time that your money has to last,” says Brookhouse.
What does your retirement look like?
If what stock images tell us is true, in retirement we’ll be on boats, taking pottery classes or walking our golden retrievers. But retirement is not one size fits all. When you’re planning your retirement, take some time to think about what you’re going to do with your post-work life, especially if your current identity is very attached to your work.
“Retirement doesn’t look like Freedom 55 for everyone anymore. There are truths to the thought that if people don’t have a retirement journey they’re thinking through, retirement can cause a lot of stress. Not just because you don’t have the money, but because you haven’t thought through what that’s going to look like on the ‘what am I going to do with my time’ side,” says Porter. Most advisors will tell you it’s best to have a plan of what your retirement years mean for you. Connect this with your financial plan to ensure you’re moving in the right direction. “… retirement is now more of a journey than a destination,” Porter continues.
Some questions to ask yourself and discuss with your spouse if applicable:
- If you’re an entrepreneur, would you work two or three days a week?
- Can your assets retire but you can (and still want to) work?
- Can retirement be a slow transition? (i.e., start working part time and slowly move into full retirement)
- Would you take a board position?
The point here is, while you’re deciding how much you need to retire comfortably, and the cost of how you’re going to spend your time, it is important not to underestimate the impact retirement can have on your happiness and well-being.
How much do you need to retire?
Ok, we get it. You’re here for the numbers. Lately, the concept of the “million dollar rule” for retirees has sparked debate, and Porter explores the nuances in an interview with Rob Carrick. The article also explores how much singles versus couples need to save. Spoiler alert: if you’re single, it might be more expensive for you to retire.
When you’re calculating how much you need, don’t forget to think about where your money is growing, and any associated taxes when you take it out. “If you have 100% of your money [in RSPs] you’re going to need a lot more because it’s all taxable versus the money in your TFSA,” warns Brookhouse. She continues, “… every dollar [in a TFSA] is worth 30 - 50% more than my RSP dollar. I feel like we have to look at things a couple of ways around your tax bracket now versus your tax bracket in retirement. I certainly have seen people drop in tax brackets … to the point where it makes a significant difference in the planning process. And then I've had people who have been making good money have a lot of assets and they're not moving that far down the down the road because they still want to live the same lifestyle. If they want to live the same lifestyle, chances are they're going to be in the same tax bracket. Everybody seems to think they're going to drop down, but it's not always the case.”
- Where are you going to live once you retire? Are you staying in your current home, downsizing, taking out a reverse mortgage?
- Who is involved in your retirement? Do you have to factor in your spouse, your children, and maybe the costs of long-term care?
- If you’re married, are you and your spouse retiring at the same time, or different times?
- Are you going to stop working on a fixed date, or will you transition slowly and work part time in the interim?
- Don’t forget your emergency fund. Advisors suggest having three to six months of living expenses set aside and easily accessible should a situation arise.
What if you haven’t done enough?
You can plan as much as you want, but life can throw some unexpected curveballs at you. If your palms are starting to sweat a bit after reading this, fear not. You’re in the right place. A financial advisor can help alleviate any concerns in this situation. Says Brookhouse, “If I break my arm, I’m not waiting for it to heal before I go to the doctor. The same thing if you have unwanted debt there can be strategies that your advisor is aware of that you aren’t, that might be able to accelerate the paying down of that debt in a way that saves you a ton of time and money.”
The bottom line? No one ever said “I wish I had waited longer to save for retirement”. Start planning now, and keep reading for more helpful saving and investing tips.