Here’s how you can financially prepare for your big exit from the workforce.
Learn how to financially prepare for a worry-free retirement
The big questions on the minds of future retirees are “How much money do I need to retire?” and “How much money will I spend in retirement?” The answer to both questions isn’t black and white: it depends.
The amount of money you will spend in retirement is dependent on multiple factors, but the three most important ones take into account how long you live, your financial situation going into retirement and your lifestyle.
● Life span. We have limited control over how long we live, so many retirement experts recommend that we plan our finances based on living to 90 years old. That calculation ensures there will be enough money to carry us through to the end of our lives and provide for us during our last years, in which we may require more care.
● Pre-retirement finances. This can have a significant impact on how much money you’ll spend in retirement. If you’re carrying debt, including mortgages, on lines of credit (secured or unsecured), car loans, on credit cards, it will cost you money. Think of it this way: Every dollar you put toward debt in retirement is a dollar that is not spent elsewhere on the things you want to do, like travel abroad, visit with family or take up a hobby.
You can resolve this issue by ensuring that you enter retirement debt-free. To do this, consider increasing your income and/or decreasing your expenses, and using the leftover amount to pay off debt. You can also think about selling assets, including your home, and moving to less expensive housing now instead of waiting until you leave the workforce. This may give you an opportunity to try retirement on for size and see how it fits and feels. If you’re overwhelmed and unsure of how to pay off your debt, talk with a non-profit credit counsellor about your options. It’s free and confidential. ● Your lifestyle. How you live will impact how much money you spend after you stop working. Most Canadians can expect three phases of retirement: go-go (active and busy—think travelling); less go (less active, settling into retirement); and no-go (more sedentary, possibly with health issues and limitations). During your go-go phase, the most active time of retirement, what do you want to do with your time? Do you want to hop on a plane and see the Serengeti or the Great Wall of China? Or would you rather spend your time in an RV travelling across the country, taking in the sights?
As you enter into a less active time of retirement, what does that look like for you? Where do you live? What does your home look like (e.g., family house, condo, RV)? What do you want to do with your time? The reality is we are all getting older, and if we’re fortunate enough to make it to the last phase of retirement, it will likely be more sedentary, and we could potentially require specialized care. Perhaps that means only minimal assistance, but it’s important to be prepared for the expense of additional support, be it a live-in caregiver or residence in a full-time care or retirement facility.