Extended Retirement
People are now living healthy lives well into their 80s and 90s so many can now expect two or three decades of enjoyable retirement. That is of course, if they can afford to sustain their lifestyle at that level for decades. Many put off retirement planning in favour of short-term goals like remodeling the home, travel vacations and a multitude of “lifestyle extras”. The problem is that, regardless of income level, most Canadians are living a lifestyle that consumes almost all their income. As a rough self-test, ask yourself what percentage of your net income did you set aside for savings or investments in the past 5 years?
At about age 45 most come to the realization that there are fewer years left in the workforce than those already spent working. Putting aside more for retirement becomes a much higher priority. The good news is; these are usually the highest-earning years and, with prudent financial planning, it may be possible to “catch up” if needed and accumulate enough funding to provide an enjoyable retirement.
During your working years you may have a variety of income sources and potential means to increase earnings through performance bonuses or by working longer hours. In retirement however these options don’t exist. The investment decisions you make now will dictate your retirement lifestyle.
How Much Will You Need To Fund Your Retirement?
To answer that question you should estimate how much income you’ll need to support the lifestyle you want in retirement. Once that is known, we’ll need to find out if your sources of revenue will generate that level of income for you. If there is a gap between the two, you’ll need a strategy to minimize the difference.
One indicator of how much you will need is to examine your current lifestyle. The cost of your lifestyle is the sum of all your after tax income less any amount saved or invested. In other words you need to ask yourself, “How much of your net income do you currently spend?”
This is only a starting point. Now ask yourself what your retirement lifestyle will “look” like. Are you going to pare it back by downsizing the home, selling the cottage or doing without one of the cars? Instead, you might be thinking of stepping it up with more travel or a new hobby. Next, determine how much you'll need to support that lifestyle. As a rule of thumb you can expect to live moderately on 60 to 70 % of your pre-retirement income, comfortably on 70 to 85% and very well on 85 to 100 %.
Once you’ve estimated the cost of your current lifestyle, you’ll need to determine what financial changes will occur between now and retirement. You might be thinking by then you’ll be better off financially because the mortgage will be paid off and work related expenses like gasoline, work attire and travel expenses will go away. It may seem logical to assume that your costs will decrease but you need to objectively consider the increases that show up like higher health care and insurance costs. Not only that, once you retire every day becomes a weekend. You’ll have about 2,000 more hours of free time to enjoy each year. Time that normally would have been spent working. You’ll have a lot more time for dining out, golf, hobbies, travel, hunting, fishing, boating, plus the other items on your list. Your plan needs to accommodate the lifestyle you’ve chosen for retirement. Travel and entertainment needs more funding than gardening and charity work.
How much you will need depends primarily on when you want to retire and whether you plan to fully retire or gradually phase it in. The amount is also dependent upon whether or not you have a life partner to share retirement income and expenses with, and of course, how long you may live.
How Much Income Can You Expect To Receive At Retirement?
Most Canadians will receive post-retirement income from the Canada Pension Plan, to which they've been contributing throughout their working lives. Other sources may include company pension plans, Old Age Security, insurance, real estate equity, and in some cases workers’ compensation. Much of your retirement income will depend on how much you have invested for your retirement in registered and non-registered savings. These income sources are generally fixed amounts that will produce investment income to fund your retirement. Business owners may have other options to consider and should Click here for more information.
If you’re expecting an inheritance you should be aware that very few parents leave enough to make a significant impact on their children’s financial situation. This is especially true if you have a parent who will need to receive long-term care.
For those who enjoy their work, choosing to retire later could be a good alternative. You might also consider continuing to work on a consultative or part-time basis. This is also a good way to make a gradual transition into retirement. Will extra income be needed to offset your retirement lifestyle goals? To really know, you’ll have to take detailed stock of your expectations and your costs. Your Integral advisor can help you estimate the future value of the income you can expect to derive from all available sources of income and the future value of expenses you may incur. The sooner the planning process begins the easier it will be for you to achieve your retirement savings goal.
If there is a gap between your vision for retirement and projected funding it may be necessary to increase your investment contributions or modify your retirement goals. You might consider increasing your savings or getting more aggressive with your investments, especially if you're younger. Another option is to downsize your home to use the equity for investments. Our aim is to help you structure a program that allows you to retire on your terms. To find out more about your retirement options, consider sitting down with one of our certified financial advisors. It's not impossible to reach your retirement income goal -- it just takes planning.
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