How much will your retirement cost? Determining how much money you will need in retirement is not easy. There are a number of considerations to take into account. You need to consider when you will retire, how much you currently have in savings and how you plan to spend your time in retirement. The amount needed to retire can vary significantly from person to person, but there are some factors you can assess now to get a better idea of how much you need to retire.
To understand how much money you need to retire, start with estimates of spending and saving. Spending generally falls into one of two categories: non-discretionary and discretionary.
Keep in mind that your spending in these categories could change as you age. For example, you may consider traveling more after you retire, which could increase your discretionary spending. Or you may consider moving to a cheaper housing situation, which could reduce your non-discretionary spending. You may not be able to exactly estimate retirement spending, but evaluating the retirement decisions you plan to make as you age can help you determine if you are on track.
When you consider your current spending and savings, you may begin to form an idea of how much you’ll need to retire. But inflation is an important consideration that can significantly impact how much money you’ll need throughout your retirement.
Inflation has the potential to decrease your purchasing power—perhaps significantly—over time. Your purchasing power relates to the amount of goods or services your money can buy. If inflation rises, your money purchases less. For example, if inflation rises at approximately 3% per year (as it has on average since 1925 in Canada),[i] $50,000 in expenses today would cost the equivalent of almost $90,000 in 20 years.
What does that mean for your portfolio and estimates of the amount you need to retire? If inflation rises, the money you count on now for expenses may not go as far in the future to provide for the same needs. If you have a fixed pension income or annuity payout, you should be mindful of how inflation will affect how far that income goes.
How can you account for inflation in your retirement planning? Ensuring that you have the appropriate asset allocation—mix of equities, fixed income, cash and other securities— to meet your needs and level of risk is a good place to start. You may need to consider aiming for a higher financial target before retiring—or perhaps cutting some discretionary expenses to increase your savings.
Your investment time horizon—how long you need your money to provide for you—is another factor to consider when evaluating if your current savings and investments are sufficient to support a comfortable retirement.
Your investment time horizon could be your lifespan, the lifespan of a spouse or perhaps even longer depending on your goals. If your investment time horizon is tied to a lifespan, it is important to not underestimate it. Consider that it is possible you will live longer than previous generations—potentially longer than you expect! If you live to a higher age than you expect, your investments will need to provide for longer.
The age you decide to retire and take pension benefits or investment withdrawals is also important. If your pension income and investment withdrawals are unable to cover your entire retirement, you may consider delaying retirement or adjusting your discretionary spending.
Retirement planning requires an understanding of how much money you currently have in retirement savings and expected pension benefits. You can begin by evaluating and estimating how much income you can expect to receive from the State Pension, workplace or personal pensions, rental income or expected work salary if you decide to continue full- or part-time work. Consider that the age you decide taking pension benefits can have a significant effect—for example, deferring your State Pension benefits could potentially increase your future benefits up to a certain amount.
You should evaluate how much you have in your current retirement accounts and be aware of some of the other savings options available to you. Here is a brief overview of some of the ways pensions and other sources of retirement income could impact your evaluation of how much you need to retire.
Additional Retirement Income Sources:
It is not always easy to evaluate exactly how much money you need to retire. There are a number of considerations to take into account, and your individual circumstances may have a significant impact on your retirement planning.
If you need help evaluating where you are, you might consider using a retirement calculator to see where you stand. These tools can help you get a general sense of where you are on your retirement saving path. And if you need help evaluating your retirement plan, or if you aren’t sure how to start planning for retirement, call Fisher Investments Canada today to speak to one of our qualified professionals or download a guide to learn more.
[i] Source: FactSet as of 31/05/2019. Rates of inflation are calculated using the Canadian Consumer Price Index from 30/01/1925 – 30/04/2019.
[ii] Canada Revenue Agency (CRA), as of 17/06/2019. Savings and Pension Plans. https://www.canada.ca/en/services/taxes/savings-and-pension-plans.html.