Retirement can be an incredibly exciting time and also one that can cause anxiety. What will you do with your time? And perhaps more pressing: How will you fund a retirement that may last multiple decades? What will your ideal retirement cost? Many retirees hope to travel more, to enjoy old or new hobbies or help out children or grandchildren. All of these can incur costs.
As with many expansive and potentially overwhelming tasks it can be easier to plan your retirement when you have some clear goals. Establishing goals can help you divide your planning into more manageable pieces and ensure that you carefully and proactively think about what you want your retirement to be like. We have worked with many retirees, and surprisingly, many don’t really consider their retirement goals before retiring. Here we offer some:
These can help you reflect on what you want from retirement, how much that is likely to cost, how much you need to save and when it might be feasible for you to retire.
Before considering how much money you will need, you can ask yourself broad questions about how you want to spend your time. Such questions can help you prioritise and reflect on what you’re hoping your money will do for you and possibly others:
Whilst answers to the above questions vary widely depending on your personal situation and interests, financial goals generally fall into fewer categories. Here are some of the most common:
You may have more than one of these goals. Regardless of your personal retirement goals, typically the next step is to estimate your retirement expenses and your anticipated retirement income. The difference between these two will give you a sense of the cash flows you might need.
Once you have a sense of what you want your retirement to be like, you can begin to estimate your expenses and your income. You can divide your anticipated retirement expenses into non-discretionary and discretionary expenses.
Non-discretionary expenses are unavoidable costs, such as housing, food, utilities, debts (whether mortgages, credit card debt or anything else) and other necessities. Whilst you might be able to economise, you generally can’t avoid these budget items altogether.
Discretionary expenses, on the other hand, are spending for wants or nice-to-haves rather than needs. Generally, these expenses are more flexible and can be reduced or eliminated if necessary. Discretionary expenses include travel, luxuries, hobbies and more. For example, you may want to gift money to children, grandchildren or charity.
Sources of retirement income may include publicly funded pension plans such as the Canada Pension Plan (CPP) and Old Age Security (OAS), employer-sponsored plans and personal retirement savings. Employer-sponsored plans include Registered Pension Plans (RPPs), which may be either defined-benefit (where your employer contributes and pays out money to you in retirement) or defined-contribution (where you contribute and decide when to withdraw money). Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are popular sources of personal retirement savings.
In addition to retirement savings, you may also anticipate ongoing salary if you plan on working part- or full-time during your retirement. If you own part of a business or plan on owning rental property, you may also expect to receive income from these sources during retirement. And taxable investment accounts can be another source of supplemental retirement income.
The difference between your estimated income and your estimated expenses is your net savings. If this is negative (as it is for many affluent retirees), you’ll need cash flow from your investment portfolio or other sources to cover your expenses. This exercise of estimating your expenses and income may help you realise that you need to adjust your plan, perhaps simplifying your retirement plans, working a bit longer so you can save more or increasing your savings levels and contributions to retirement accounts.
Regardless of what you discover, we believe that thinking ahead is the best way to prepare yourself for retirement. And it is never too late or early to plan and save for your retirement.
Setting goals, estimating your expenses and income and determining how you’re going to fund your retirement can be complicated and daunting. You may not know quite where or how to start. If you’re looking for guidance, Fisher Investments Canada may be able to help you and your family define retirement and financial goals and plan for your future. Contact us or download one of our retirement planning guides to learn more.