Retirement can be very appealing. No more demanding bosses or boring commutes. Investment brochures show photos of happy couples sailing on yachts, strolling along pristine beaches at sunset, or golfing with friends. Here’s how to make your own retirement dream a reality:
What’s your number?
The old saying “what gets measured, gets done” certainly applies to retirement planning. The more specific we are about our savings target, the easier it will be to achieve it. One of the easiest ways to ballpark your “magic number” is with this simple calculation:
· Estimate how much you want to spend annually in retirement.
· Subtract any income you’ll receive from government and company pensions and benefits.
· Multiply that new amount by 25 (or 30 or 35, for a bigger buffer).
Example: Say you expect to spend $100,000 annually (before tax). You estimate that, together with your partner, you’ll receive $50,000 in government/corporate benefits, leaving you with a $50,000 annual shortfall. $50,000 X 25 = $1,250,000 = your target amount.
If this number seems too rich, simply adjust the levers until it makes sense. Could you reduce the spending goal, increase income with a part-time job, monetize a hobby or gain rental income, or simply postpone retirement by a few years? Consider whether you plan on leaving money to heirs or charities as well, as this will impact how much you’ll need to save and how much you can spend.
The sooner you start saving, the faster you’ll reach your goal. How fast? The “Rule of 72” estimates how many years it will take for your investment to double. Simply divide 72 by the annual interest rate to estimate the time period. For example, if you start with $10,000 and interest rates are 3 per cent, then 72/3 = 24 years. Therefore, in 24 years, $10,000 will have doubled to $20,000.
How much can you safely spend in retirement?
After a lifetime of saving, it’s challenging to begin the process of deaccumulation to now live off those savings. For those with defined benefit pension plan (typically federal government workers), this task is easier. In Canada, only 24 per cent of private sector employees have access to a registered pension plan of any kind. That means the majority of workers must rely solely on their own investments. Fortunately, there are numerous studies that point the way to a successful retirement.
Firstly, it’s important to define the term “sustainable withdrawal rate”. This is the annual maximum spending rate without running out of money in your lifetime. However, few people would define retirement success this way. Not only would they not want to run out of funds completely prior to the end of their lives but they would want sufficient funds throughout their entire retirement.
Various studies have concluded that 4.0-4.5 per cent is a sustainable withdrawal rate for a 50-year period, assuming an asset allocation of 75 per cent stocks and 25 per cent bonds.
· Year 1: Starting amount is $1,000,000. Withdraw $45,000. (based on 4.5 per cent)
· Year 2: Increase withdrawal amount by the rate of inflation to maintain spending power.
The biggest determinant of the success is the year in which you retire. Retire during a bull market and the portfolio will have greater longevity than if you retire in a bear market. If you can’t control when you retire, consider putting aside a few years of expenses in cash or GICs to avoid selling equities in a falling market and use these funds to “pay yourself”.
What are your sources of income?
Having multiple sources of income during retirement is a good thing. Many people will receive between 30-40 per cent of their retirement income from government benefits such as Canada Pension Plan (CPP/QPP), Old Age Security (OAS), and Guaranteed Income Supplement (GIS). Other sources of income are RRSPs/RRIFs, TFSAs, corporate pensions, dividends, capital gains, interest income, plus possibly rental income, part-time jobs, insurance payments such as annuity income, inheritances/legacies, and even lotteries. Even small amounts of incremental income will extend your nest egg.
Your chronological age vs your biological age
People assume that their spending pattern will remain consistent throughout their retirement. In reality, there are at least three retirement phases, each with its own spending pattern. During the initial “go-go” phase, retirees may spend a bit more as they take those “once-in-a-lifetime” vacations or invest in home renovations. At some point, after the African safaris and kitchen renos, during the “slow-go” phase, they may spend less. Finally, during the “no-go” years, health-related issues may reduce lifestyle spending, even though healthcare costs may increase.
Also, remember that our chronological age is not necessarily our biological age. A 70-year-old who takes up mindfulness meditation, veganism and marital arts training may reduce her biological age and need to adjust the retirement financial plan for a longer lifespan!
Rita Silvan, CIM™️, is personal finance and investment writer and editor. She is the former editor-in-chief of ELLE Canada magazine and is an award-winning journalist and tv media personality. Rita is the editor-in-chief of Golden Girl Finance, an online magazine focusing on women’s financial success. When not writing about all things financial, Rita explores Toronto’s parks with her standard poodle.
Rita Silvan is a paid spokesperson of Sonnet Insurance.