How much will retirement really cost?
Not nearly as much as you think, expert Frank Wiginton says
Let’s face it: Planning for retirement and figuring out if you can afford it can be a total nightmare.
For starters, the financial industry constantly tells us we aren’t saving enough for life after work and that we probably won’t be able to afford to leave when it’s time to go.
Meanwhile, banks and brokers bombard us with ballpark figures and random percentages of how much of our current income we must squirrel away in order to retire comfortably — or at all.
“I have a real problem with the idea that you need to have 70 per cent (of preretirement income) or a million dollars to retire. It’s a load of hooey,” financial wellness expert Frank Wiginton says.
“Everybody will have a different type of retirement in mind, so that type of thinking just keeps you chained to your desk longer,” says Wiginton, who runs financial planning workshops and coaches people in the workplace who are ready to make the leap out the door.
More than1,000 Canadians are reaching retirement age every day, and will do so for roughly the next 20 years. While millions of North American baby boomers are retired or contemplating retirement, many others are putting it off, figuring they can’t fund it or would just rather continue working while they’re still healthy.
Sixty per cent of employees say personal financial well-being is their number one source of stress, contributing to higher instances of sick leave and lower productivity. And retirement is the granddaddy of all issues they must tackle, he says.
But fear not. Recent studies such as one from Sun Life Financial show retirement is less challenging than many Canadians fear — and more affordable than we’ve been led to believe.
“When people are preparing for retirement, what are they experiencing? They’re stressed, they’re confused and probably a bit intimidated by it. They’re looking for solutions to help them get prepared and reduce their anxiety,” Wiginton says.
“But people want to get excited. And they should,” he adds.
“People who are retiring — I call it changing gears — are usually significantly better off (financially) than they realize,” agrees William Jack, who is also an independent retirement counsellor.
Jack says it’s amazing how many clients think they will have to work forever to afford retirement.
“The most rewarding part of my job is telling people they are on the right track and significantly better off than they realize,” he says.
Wiginton has worked out a table showing how much you will need to save to generate a given amount of income for a given amount of years at a given rate of return.
In other words, how much it will cost to retire.
The main thing he drives home is that retirement income should not be based on pre-retirement income, but rather on your retirement expenses. So the money you need to save is the difference between your known income after retirement and your annual amount of spending while in retirement.
“The single biggest thing is: how much am I spending to be able to live — and pay attention to lifestyle (including entertainment, travel and personal care). That’s why I believe it’s critical that each person take the time to determine what their lifestyle plans are, and do a little research to determine what the cost of that lifestyle may be in retirement,” he notes.
And he acknowledges that it’s very difficult to wrap your head around a solid plan for how to live the next chapter of your life — let alone how much money you will need to finance it — on your own.
Wiginton’s chart shows the amount needed to fund your retirement, with or without a company pension. It also applies to couples and single people.
Say you will need your savings to generate $30,000 a year for 30 years and you estimate you will be able to get an average 4-per-cent rate of return, which is a conservative estimate. You would need $518,760 in personal savings.
Don’t think you’ll live that long — maybe only 20 years after your career ends — but expect to live a little larger? You’ll have to sock away more: about $679,500 according to Wiginton’s table.
Nearly half of Canadian workers do not have a company pension, so with less coming in as retirement income, a larger amount of money will be needed.
“If you don’t have a pension then you will need, say, $20,000 more to fund retirement, so you would look to the chart amount that’s $20,000 higher,” he says.
While rare today given the scarcity of gold-plated pension plans, he has some clients who don’t need to save anything beyond what their pension will provide because it will pay them more than they are likely to spend in retirement.
Some may have lavish plans and goals for retirement, like purchasing a property in a warmer climate or buying a sweet ride and driving across the country. Others may wish to join expensive golf clubs and travel the world, so they may require much more income postretirement than they did pre-retirement.
“Until you clearly define what it is you want to do, it is very difficult to determine exactly how much money you will need,” he said. According to the chart, you wouldn’t need $1million in savings to retire, unless you expect to live 45 years after you leave your job.
One big caveat: you can do all the planning in the world, but can never prepare for major life events such as illness, marital breakups and big expenses such as the roof literally caving in on your house — all of which throw the financial plan out of whack.
Additional retirement income
Many people look at their pension statements or their RRSP savings and think there is insufficient money there to enable them to retire.
Wiginton points out seven common sources of retirement income outside a pension to keep in mind:
CPP could add up to $11,000 a year in income;
Old Age Security could give you another $6,000 a year;
If you have money saved in an RRSP, it might generate another $5,000-$10,000 a year in income, maybe more depending on how much you socked away;
Tax free savings accounts provide tax-free income throughout retirement;
Nonregistered savings accounts;
Inheritance: People often don’t wish to include this in their planning, but it is definitely a source of assets that would help;
Real estate options, including a reverse mortgage, downsizing or selling off your property completely.
You get used to living on less
A recent study of both working Canadians and recent retirees found Canadian retirees “are in a pretty good place,” says Kevin Press, assistant vice-president, market insights at Sun Life Financial.
Nine out of 10 retirees reported feeling positive about post-work life. The majority (62 per cent) said their emotional health improved after leaving the workforce and 59 per cent say life is more fun than when they were working.
On average, they are living on 62 per cent of their pre-retirement income, and the vast majority (88 per cent) say they feel positive about their new lives away from the workforce.
Nearly half said they spend less than they expected and exercise more.
When asked what they think is the biggest financial surprise of retirement, the top answer (from 32 per cent of respondents) was how easy it is to live on a reduced budget.
In stark contrast is the anxiety among working Canadians related to retirement: Only 20 per cent of today’s workers think they can afford to fully retire, while 77 per cent said they figured they would still be working full-time at age 66, past the traditional retirement age.
The results are “really fascinating,” Press says.
A notable difference however is that 61 per cent of current retirees are in a defined benefit pension plan while only 36 per cent of working Canadians are now, the report says.
“Today’s retirees are living well,” he adds.
The survey was conducted by Ipsos Reid, which conducted online interviews with 4,010 Canadians. That includes 2,006 retired Canadians (all no older than 80) and 2,004 working Canadians ages 30 to 65.
What you spend less on in retirement
Taxes: Your income tax rate automatically goes down since you will be earning less money.
Mortgage: In many cases (not all), the house will be paid off, which will reduce your expenses dramatically.
Pay stub deductions: From CPP and Employment Insurance to disability insurance and union dues — these will no longer be deducted from your income. Daycare: The kids will be grown. Children’s expenses: Ditto. Retirement savings: You are al- ready there!
Commuting: Save on gas, parking, transit pass, wear and tear on vehicle, etc.
Lunch and snacks: No more trips to the food court at noon or that 3 p.m. java to keep you awake.
Business attire: You’ll spend less on clothing in general.
Personal care: Fewer trips to the dry cleaner, salon, etc.
How to figure out how much you will need
This is a simple equation: how much will my income be in retirement, minus how much I need to live on.
The three steps: 1. What will be your living/lifestyle costs? Include necessities such as housing, transportation, food and financial obligations. Under lifestyle, besides entertainment and travel, Wiginton includes food because some people are foodies and shop at higher-end grocers or eat regularly in restaurants. 2. What will be your sources of income? Include all sources: Canada Pension Plan, Old Age Supplement, pension, RRSP income. 3. Subtract the answer in step 1 from the answer in step 2. To get a head start, Wiginton suggests a homework exercise: go through all your monthly expenses and find a way to shave a modest 10 per cent from the list — a move made famous by The Wealthy Barber author David Chilton.
“People who are retiring — I call it changing gears — are usually significantly better off (financially) than they realize.” WILLIAM JACK INDEPENDENT RETIREMENT COUNSELLOR “I believe it’s critical that each person take the time to determine what their lifestyle plans are, and do a little research to determine what the cost of that lifestyle may be in retirement.” FRANK WIGINTON FINANCIAL WELLNESS EXPERT
The emotional cost of retirement
Often when planning for retirement, the hardest thing to determine is not finances, but what will make you get out of bed in the morning.
Essentially, the question becomes: “Who am I outside my career?”
Finance, lifestyle and aging adviser William Jack says there can be a troublesome loss of identity for many who define themselves by their jobs or career title.
“We can work through the financial side fairly quickly, but it will take years to rebuild your lifestyle after changing gears” into retirement, he says.
It’s particularly hard for workaholics who logged six-day weeks and 18-hour days and have no hobbies or outside activities to look forward to, he says.
“You still must find something to do with your time. I try to help them understand what the next stage is going to look like and feel like,” says Jack, who sometimes suggests working part-time.
Add to the fact that divorce has become more common in this age group, as people live longer and have different concepts of what they want to do in retirement.
In Canada, divorce is spiking only among 50-plusers and becoming an increasingly common event for couples 65 and older, according to Statistics Canada.
Jack advises clients to first take a break of six to eight weeks to let it sink in that you’re in a different stage of your life, “like a grieving process.”
He says in that time it becomes clearer what you might want to do with your new-found free time. And that could take any shape, from taking courses to volunteering, taking up a sport, or working part-time.