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Can I Afford to Retire?

Can I afford to retire?

Every year – especially in the summer – we hear from clients trying to figure this question out. It feels like this year those requests have increased. We’ve seen big shifts and changes in a lot of industries – and in some cases even people who were ready to stick it out for a few more years aren’t so sure they want to learn a whole new way of working virtually.

After doing several hundred pre-retirement seminars – and working with thousands of clients – over the years, here are a few questions we consistently hear:

How much money do I need?

That answer’s an easy one. Are you ready?
It depends.

Do you have your major expenses paid off? Are you still carrying a mortgage? Is your car paid off? Are there still debts you’re servicing? This will increase what you’ll need.
What are your plans for retirement? Do you plan to travel extensively, or garden in the back yard, using your own seeds? Different lifestyles will have different needs.

Assuming that you have no debt to service, there are different “rules of thumb” in the industry. For example, the Sun Life Retirement Now Report found that Canadian retirees are living on an average of 62% of their working income. In dollar figures, the Statistics Canada Survey of Household Spending for 2017 found senior couples on average spent a combined $60,359 a year (including tax payments). For perspective, the average Canadian household spent $86,070 (including taxes) in 2016 – closer to 70%. Keep in mind, that’s across the country, and housing and other costs may also vary by region. That is just to cover core living costs.

A Moneysense Article from 2013 tried to put some totals together based on different levels of lifestyle. For example, an “average middle class” couple would need about $70,000 / year in income and would need about $625,000 saved according to that study. An “average middle class” single would need about $39,000 / year, or $600,000. Again, this is exclusive of any pensions or debt obligations. The full chart is here.

If you want to see how far you could stretch what you have saved now, a great, simple tool to use is the Income Wizard. This allows you to put in a lump sum and figure out how much you could take out without running out of money.

How will I know for sure unless I actually retire?

There are two strategies to get a handle on this:

Strategy 1: Build budgeting into your lifestyle

Put together a budget that lists everything you’re spending money on now, and how you see that changing in retirement. You can find a digital worksheet on our site.

Or take advantage of technology – budgeting software has come a long way – current products will connect securely to your bank account to make sure no spending gets missed; allow you to put spending into categories; and even allocate your upcoming spending down to the last dollar. Three popular programs out there right now are mint, youneedabudget, and everydollar.

Strategy 2: Crash test your retirement.

All those years you’ve been working, you’ve been building up RRSP contribution room. If you haven’t maxed that out every year, you likely have a large sum of money you could “pay yourself” in your RRSP – and reduce your taxes now. (Check your Notice of Assessment on your tax return to see your RRSP Contribution Limit.)

If you set up regular payments into that – ideally right from your payroll department – you’ll accomplish three things:
1. You’ll build up your nest egg – bringing you that much closer to being able to retire by choice.
2. You’ll be reducing what you pay in taxes for your final working years – which for many people, are the highest tax bracket they’ll be in for their whole lives.
3. You’ll be getting a feeling for what it’s like to live with less. For some people, this will be pretty comfortable – they’ll realize that without work-related costs, they’d probably be ok with less income coming in. For others, it will be a wake-up call – that maybe, it’s not quite time financially to make that decision.

The good news is, that money you’re investing in yourself when you do this is still there ready to be used whenever you need it!

Retirement can be a big step to take – but if you make it your “job” in advance to figure out what that looks like for you, it can make that decision a much easier one. And of course, if you’re ever looking for some guidance on what to do, please feel free to contact us and let us know how we can help!