When you start working with a Financial Advisor, one of the first topics of discussion will be around how much you need to save for the retirement you want. While having an objective to shoot for is important, it’s important to understand that retirement planning isn’t only about numbers, whether the age you want to retire at or the value of your savings and investments.
Retirement planning also means thinking about the kind of lifestyle you want to live, and how that may evolve as you age, and your plans change.
For that, you’ll need to think beyond calculations and consider the experiences and amenities you value most.
Here are a few key factors and strategies that can help you identify and save for the retirement you envision.
Saying Goodbye to Some Pesky Expenses
While ideas around retirement should become clearer with every passing year, you’ll still want to look at your household budget today and think about how your cash flows may change as you get closer to your retirement years. You’ll be happy that certain expenses may already be done, like paying off a mortgage or funding a child’s education. Other significant expenses may decrease or go away entirely as you age, like commuting costs or some home maintenance costs and property taxes, which could be eliminated if you were to decide to downsize and rent.
Funding your retirement
Over the years, financial professionals have suggested to clients that they will need around 70% of their final working annual income to maintain their standard of living in retirement.1 But one retirement size does not necessarily fit all. It ultimately comes down to what you want to do with your time.
According to one retirement survey, 81% of people who had just left the workforce said maintaining health and wellness was important to them in retirement, 68% said the same about spending time with friends and family, and 48% said travel was extremely or very important.2
Other goals might include buying a vacation property, spending more time on your hobbies or even starting a business. Whatever your goals, it’s important to understand how they affect your income needs and savings milestones. That’s why it can help to tally a budget projection that accounts for inflation and unexpected expenses, like a sizeable auto or home repair, that can pop up on the proverbial “rainy day."
Turbocharge your savings
You can expect certain income supports in retirement, such as Old Age Security and Canada Pension Plan payments. But you’ll need to keep track of other potential sources of income, such as a workplace pension. Once you add those numbers up, you’ll have a better idea about any income gaps and how to grow that income before and during retirement.
A Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) are potential options. Both accounts offer tax advantages that can help your money grow and compound faster than it would otherwise. Incorporating a spousal RRSP, which can help a high-earning partner maximize their RRSP tax deductions, may be another consideration for some couples.
In addition to using tax-efficient investment accounts, you can also look for ways to increase your savings as your family and housing expenses decrease. You might consider, for instance, capitalizing on any unused RRSP and TFSA contributions from past years.
Throughout this process, it’s also important to work with a Financial Advisor to come up with an investment strategy that takes into account your time horizon and risk profile. Financial Advisors can help make sure your portfolio is sufficiently diversified and appropriately allocated in such a way that it can withstand certain adverse market conditions.
Make your money last
With the average life expectancy at 82.8 years3 for Canadians (and many people living into their 90s), some may find they need their retirement savings to cover costs for up to three decades after they decide to retire. Retirement savings, then, will need to do more heavy lifting than they used to.
What’s more, the demands on your savings do not stay constant. When Financial Advisors look at that three-decade span, they see a barbell. The first 10 years of retirement, until age 75 or so, are among the highest-spending years, as still-active seniors make the most of their time travelling and participating in their passions. During the next phase, roughly ages 75 to 85, declining mobility typically curtails some of that activity, and expenses tend to go down, even if you continue to live independently. In the final phase, a person’s late 80s, 90s and beyond, the cost of living can rise again with the need for higher levels of care.4
It’s worth thinking now about how your retirement savings are going to hoist that barbell — and your goals.