Reaching the age when retirement is near and having enough money to sustain your lifestyle is the ultimate goal for most people. Saving up just the right amount, however, can appear daunting. It’s critical to start saving early on in life and continuing with this practice for as long as possible. So, this article begs the question, just how much is enough to retire?
Senior couple checking bills satisfied with amount they see on screen.
So then, how much is enough to retire? Take a look at some classic retirement saving strategies often proposed by our team of Assante advisors.
1. Sorting Out the Financial Guidelines
It’s fair to say that there’s no clear pathway towards a perfect amount of money in retirement. Financial advisors and planners alike all have differing strategies or approaches on how to best go about this goal. Some will work for certain individuals while others will not. Ultimately, it is safe to say that one of the best ways to save for retirement is by doing some research and starting early on in life.
Read over some of these common and practical financial guidelines. They may or may not work for your particular financial situation. Comparing them with your personal goals can help you make the right decision towards how much you feel you need to retire comfortably.
a. The Four-Percent Rule
How much money will I need to retire comfortably? Consider the four-percent rule first. The idea behind this savings strategy is based on future spending.
If you plan on taking out four percent of your savings each year in retirement, you’d need to save up this same amount beforehand. Spend $50,000 each year in retirement, and you’ll need to have at least $1.25 million in savings. This amount is based on being retired for about 25 years. If you plan on retiring early or your family members tend to live well into their 90s, you may want to save more.
b. Taking a Percentage of Your Income Now
Try another strategy by estimating your retirement savings. Consider your income right now. In most cases, you’ll need between 70- and 90-percent of your current income in retirement. You’ll normally require less income because certain debts may be paid off by the time retirement arrives, such as paying off a mortgage, student-loan debt or credit cards.
Although these percentages may seem high for retirement, they also give you an idea of inflation. Goods and services will inevitably rise in cost when you enter retirement, so this estimate covers those incidentals.
c. The Multiplying Method
Another clever way to know how much is enough to retire is by using your current income. Assuming you’re at the pinnacle of your career, take your yearly salary and multiply it by 10 or 12. For example, a career paying $50,000 a year equates to $500,000 to $600,000 with the multiplier involved. When this amount is invested over the years, it should cover the majority of your monthly bills. Keep in mind that this strategy is based on your final income amount, which is usually close to retirement in the first place. It may be a bit difficult to figure if you’re still climbing the corporate ladder.
2. Considering Health Expenses
You may be a healthy individual in your younger years, but aging will take its toll on everyone. Anyone in the later years of their retirement should consider that they will quickly begin spending spend far more on healthcare than in the earlier years of retirement. This is only normal as the body ages and requires more support to sustain the “optimal” lifestyle.
If you are considering relying on what Medicare will cover in retirement, consider also that the Canadian government will not completely be able to look after all of your possible needs. As one ages in Canada, they must consider out-of-pocket costs associated with expenses that may arise as one ages.
Three key financial product solutions Canadians considering retirement may want to consider are commonly going to be critical illness insurance, long-term care insurance and disability insurance.
3. Remember Social Security!
The Canada Pension Plan (CPP) retirement pension is a monthly, taxable benefit that replaces part of your income when you retire. It must be applied for and is not automatically distributed to those at retirement.
Additionally, regarding social welfare and financial subsidies that exist for all Canadians, consider also, post-retirement benefit, disability pension, post-retirement disability benefit, survivor’s pension, children’s benefit and the death benefit. Social Security can help you during retirement so that funds stretch far enough in your budget every month.
4. Thinking About Lifestyle
Senior, happily driving a car
How much money will I need to retire comfortably? Everyone will have a different definition of comfortable. Think about your lifestyle. Ask yourself if you’ll continue to spend about the same amount of money on fun items or if other hobbies are in mind. You might take up golfing or buy a boat. Any luxury hobbies will require more money during retirement. Set your goals early on so that you can achieve a comfortable savings amount.
5. Working in Retirement
Many people think about alternatives to saving money as retirement quickly approaches. They may need all of their paycheck right now. Workers promise themselves to supplement their income with work during retirement. Although it’s possible to work during retirement, most people don’t end up with a paid position. There may be health concerns or competition in the workplace. It is always wise to save up more than you think you will ever need.
6. Maximizing your RRSP contributions!!!
Many people don’t save enough out of each paycheck now to cover their basic expenses in the future. If you’re concerned about having enough retirement income, try the one-percent trick associated with your RRSP’s. Some workers enjoy a yearly raise in their income, which can range from two to six percent, for instance. Instead of pocketing all of the extra funds, allocate at least one percent to your RRSP’s. Although it’s only one percent, it can add up over time. It’s also a pre-tax item, which helps you on taxes.
In short, regardless of how much you save up for retirement, it’s always a good rule of thumb to avoid touching it for any other reason. You can always borrow for say your child’s university or first home purchase. However, your retirement savings cannot be so easily replaced. Keep this fact in mind as you save and spend as a responsible adult.
Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc.
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.