Retirement: What’s Your Magic Number?
There have always been varying opinions regarding the amount of income needed to ensure a comfortable retirement. While some suggest an annual target of 70 percent of pre-retirement income, others advise 80 percent or more. Still, others argue that these targets may be too high, pointing to the fact that pre-retirement spending is often lower than we perceive. As payroll deductions, work-related expenses, mortgage payments and child-related costs make up a significant portion of expenses during our working years, it appears we may be able to live on much less than we believe.
Of course, the amount of income required for retirement varies based on the individual and their particular circumstances. For some, income requirements can actually increase after retirement, depending on desired lifestyle. This is why it’s important to give thought to the type of retirement lifestyle you envision and consider all of the associated costs as you plan ahead.
Is Your Target Too Low?
Even after taking into account your expected retirement expenditures based on lifestyle choices, there are other factors that can impact your retirement income:
Healthcare Costs — Many retirees cite healthcare costs as the most unanticipated of retirement expenses, often a result of unexpected illness or disability. The average retiree’s out-of-pocket medical costs are in excess of $5,400 per year, not including long-term care. Long-term care costs can be more significant: the cost of assisted living in a private facility is estimated at between $40K and $100K per year. Even at a government-subsidized facility, out-of-pocket costs can range from $25K to $40K annually. Many Canadians have made no provision for these costs.
Obligations to Family — There may be unforeseen obligations to family, such as a child or parent who may require financial support.
Rising Cost of Living — Increases in inflation or changes to tax law may add to retirement costs.
Sources of Income — Some individuals may be relying on future sources of income, such as home equity or inheritances, to fund retirement. However, these may end up being smaller than expected or not materialize at all. Even those who expect to continue working into retirement may be forced to end work due to illness or economic changes. The good news? For those who save and invest over time, the path to achieving retirement targets becomes shorter.
Factor in Longevity
As we continue to live longer lives, we must factor in the need to fund longer retirements. While the average Canadian will live to around 83 years old, your longevity may be greater still. So, if you were to retire at age 70, the average life expectancy would suggest 13 years of retirement, but this could extend to over 30 years if you are part of the growing group of centenarians.
We’re Here to Help
We can help you to map how everything fits together, setting retirement income targets based on your desired goals, factoring in your income sources and developing a plan to achieve those targets. This is one of the many services we offer our clients. Having a plan in place provides a retirement advantage that many Canadians don’t have, and it is an important part of helping you to achieve the happiness you envision for the years ahead.