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How much do I need to retire?

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how much do I need to retire in Canada
  • How much money do you need to retire?
  • How do you know that you are ready to retire?
  • How much money do I need to have saved up before I retire?
  • How much money do I need to retire in Canada?

All of us want to live well in retirement but what does it means for YOU?

We are going to talk about the money.

But first, let’s talk about the idea of retirement. It’ not anymore about turning 65 and it’s time to retire. People living longer, are enjoying life more and really retirement this day all about financial independence.

The second you can be financially independent RETIRE.  

The sooner you can retire, the more enjoyment you will get out of your retirement. None of us know when we are going to have a medical issue or crisis. None of us know how long we have.

And those of you who know about my own story. I had a spouse that died at 42. None of us know. He never even made it to retirement.

The sooner you can retire or semi-retire and enjoy the rest of your life the better.

How Much Income do You expect to live on per year?

There are many rules of thumb out there when it comes to retirement and how much you will need to retire.

  1. 4% Withdrawal rate
  2. Desired annual retirement income x 25
  3. 70% of working income (or more)
  4. Pre-retirement income x Multiplies of 10 to 14

And believe me, it’s all just talk. Everyone’s situation is different, but there is this idea that you need a million dollars to retire comfortably. Well maybe that’s true and maybe that’s not.

If you are planning to retire in Toronto or Vancouver, you probably will need a 2 million to retire. Just because the cost of living is extremely high.

If you are planning to retire in a rural area like Elliot Lake in Ontario you can do it only on Canadian Pensions and a moderate emergency fund.

But there are many more ways to have income without having that much money. And one of the ways is to create multiple streams of income through rental property or side business, that can replace your current income.

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If you ever Google retirement budget calculation, you will come across many of them, but the result will be approximately 80% of your current income. And I never really understood that. I mean, I understand the theory behind it, but it doesn’t work in practical life.

The theory IS when you retire your expenses are going to be way lower.

Now, here is the problem with that. When you are working, yes you have expenses that you don’t have when you retire. You have work clothes. You have to travel back and forth to work. There are certain expenses that go with work, that you don’t have when you retire.

However, when you at work what’s going on in your house? Nothing.

Ok.

Now let’s say you retire. Are you going to sit in your house and stare at the wall?

Seriously?

Because if you want to go and do things; play golf, knit, go to see the grand kids, go to Europe. All that staff takes money! Over and above your regular monthly expenses.

So, the idea that somehow you are going to live this fabulous, retired life on 80% of your current income is completely invalid for most people.

What Should You Expect in First Two Years of Retirement?

When people retire often, they spend the first two to three years REALLY enjoying retirement. They go all those places they always wanted to go. They go see all those people they wanted to see, the grandchildren, the friends, the family members, the reunions. They do all of that.

And the next thing they know their retirement account is about 30% less than they thought it would be. That happens a lot. People retire and then immediately start drawing down the principal of that retirement account.

But just the way compound interest works for you when you are building that account, it works against you when you are removing money. When you start removing that principal it means there even less money to make money for your future.

So, if you start drawing on that retirement account down by 20 – 30 % in those first few years, that money is not there to continue making you money.

And when you calculate your retirement budget and all those projections with your financial person on how much you will need to retire. Those projections and calculations are based on your money staying there and you removing none to very little of that principle.

You can really get yourself into a bad way, if you don’t pay attention not only to the money you really going to need to retire. But also some extra so you are not damaging that principal really quickly.

Pre-Retirement

One of the issues with retirement is that people don’t pre-retire.

And here is what I mean by that. The best thing you can do before you retire is doing a trial run. Pre-retirement.

Think about how you are going to live.

Start lowering your expenses.

If you are going to sell your house eventually and retire somewhere, sell it NOW!  Don’t wait until you retire.

Because you are not really ready to live on less.

It’s impossible to be completely prepared for the reality of relocating or living in a smaller home.

If you pre-retire while working you will see a clearer picture of what retirement is going to look like for you.

  • Are you going to travel?
  • How much are you really going to spend?

Because it’s going to be more than you think it’s going to be. It’s always more than you think it’s going to be. And those expenses will escalate so do some real calculation with real numbers on what the next five years are going to look like and then the next 10 years are going to look like.

The fear of running out of money becomes very real and you can become very unhappy.

A lot of planning is required.

Financial stress is horrible.

For some of us COVID-19 provided a preretirement trial. How did it go for you?

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Gray Divorce

No retirement means different things for different people. It’s not unusual for you to be married to someone for 30 years and you finally get to the point where you are thinking about retirement to only realize you have very different ideas on what that means.

What does that look like to both of you in terms of going places, spending money, where are you going to live?

Having those discussions early is how you avoid issues.

What is Gray Divorce?

Grey divorce is a demographic trend that refers to an increase in the split or separation of older couples over 60 who have been married for decades.

Gray divorce is getting more and more prevalent. One of the reasons is people are living so long.

One day you sit down and realize that your ideas of retirement are completely different. You become two different people and each of you starts to think “I don’t want to live next 20 years next to this person,” and they divorce.

And your assets are immediately cut in half which is equivalent to financial suicide for so many.

Preretirement planning, getting people on board, and having a good solid relationship is a good way to protect yourself long term in retirement.

Determining How Much Money You Need to Retire

Do at list two different calculations.

FIRST RETIREMENT BUDGET CALCULATION

Start from the budget that you have now. How much do you spend on the place where you live? How much do you spend on food, car, and etc?

In your calculations, remember to eliminate expenses that may no longer be relevant in retirements such as mortgage payments, cost of commuting to work, childcare expenses; RRSP, CPP, and EI payments, etc. And remember to add new expenses that may crop up such as travel expenses, hobbies, health issues, and so on.

SECOND RETIREMENT BUDGET CALCULATION

Start your budget from zero. Ask yourself if I could not live in this home anymore or apartment and I had to go out and find the place to live would I choose something similar to what I am in for the SAME PRICE?

Look at your life and items in it objectively as possible.

How much do you use?

Base on today’s environment is it worse paying for it.

Object is to free up money that can give you financial freedom life.

I want to challenge you, go through your budget, your expenses and re-evaluate what can you do without. And then use that money to reach your financial goals.

Consider adjusting your retirement lifestyle expectations and spending less.

PLAN FOR UNEXPECTED EXPENSES IN RETIREMENT

Unexpected events can have a big impact on your retirement savings.

It’s possible that you could face:

  • Having to retire earlier than expected because of personal, professional, or health reasons
  • Major unplanned expenses such as home or car repairs
  • Health emergencies, or a need for additional care, for yourself or a loved one
  • Financially dependent kids in retirement
  • Having to move or make changes to your home because of a change in your health or the health of a loved one
  • Divorce
  • Run-away inflation or a market crash
  • And much more

To help plan for unexpected events, set up a bank account or another type of investment or savings tool to use as an emergency fund. Have a percentage of your income automatically deposited into the account.

IMPACT OF CANADIAN INFLATION RATE ON RETIREMENT 

In recent years, the average rate of inflation in Canada has been 2% per year. What the economy after 2021 will bring us is unknown. But we can expect a much bigger inflation number.

When calculating your retirement budget, keep in mind that goods and services will cost more in the future. You can predict how much more goods and services may cost by looking at rates of inflation in past years.

Average Canadian Retirement Income At 65 In 2021

If you have lived and worked in Canada before retirement, you can expect to receive Old Age Security (OAS) and Canada Pension Plan (CPP) benefits. The amount you receive will generally depend on how long you have lived in Canada (for OAS), how much you have contributed to the plan, and for how long (for CPP).

The maximum monthly OAS payable in 2021 (January to March quarter) is $615.37 for a total of $7,384.44 per year, while the maximum CPP was $1,203.75 for a total of $14,445 per year (2021). source

Most people will get less than the maximum amounts.

The average monthly CPP benefit paid as of October 2020 was $689.17 (41% less than the maximum amount payable at the time).

For individuals who immigrated to Canada in their adult years (like me), the total government pension they will be eligible for will be significantly reduced.

Using the 2021 maximum government pension amounts as an example, total payouts from this source to a single senior was:

$7,384.44 (OAS) + $14,445 (CPP) = $21,829.44 per year

WATCH: Canada’s 3 Pension Plans – How do OAS, CPP and GIS Work?

If for one reason or the other, you are unable to save enough money for retirement at age 60, or 65 consider doing:

  • Work for longer and delay government pension till late
  • Semi-retire and work part-time
  • Start saving aggressively
  • Spending less
  • Downsizing and sell your home

Some resources that may come in handy as you plan for retirement include those provided by the Canadian Life and Health Insurance Association and this Retirement Calculator.

Thanks for reading this article – I hope you found it helpful. As always, I’d love to hear from you! Have a fabulous week and take care! Irina Nikitina – Founder of Modern Fifty TV

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