FP Answers: Do I really need 70% of my working income to retire comfortably?

There are various rules of thumb to determine if you have enough for a full retirement, but here’s a better way to determine it for yourself

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By Julie Cazzin with Allan Norman

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Q: I have read that in retirement you need about 70 per cent of your working income and I am just wondering if that is accurate? How do I know if I have enough? — Juliette in Toronto

FP Answers: Hi Juliette. Forget about the 70 per cent and, just for a minute, embrace your mortality. What if you approach your retirement plans by thinking about what you want to do and achieve while you are still fit and able, recognizing that time is whizzing by? How much money will be enough to give you that lifestyle, so you never have the fear of running out, no matter what?

To help you understand if you have enough and where the money will come from, imagine a bucket, and inside the bucket are your registered retirement savings plans, registered retirement income funds, tax-free savings account and cash. These make up your liquid or cashable money that is available to you at any time.

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Sitting above this bucket may be a home, cottage, rental property, business and/or pension plan. These are your fixed assets and some of those assets, such as the rental property and pension, will drip money into your bucket.

Ideally, you will have enough money in your bucket so that you will never be forced to sell one of your fixed assets.

While you are working, you are adding money to your bucket. When you stop working, Canada Pension Plan (CPP) and Old Age Security (OAS) will add to your bucket.

Of course, as you are adding money to your bucket, it is draining out the bottom through one of three taps.

The first tap is to pay for your lifestyle while you’re working. Once you stop working, the second tap, the retirement tap, gets turned on and you may find you are spending more money because you have more time to do things. At some point, the retirement tap, sadly, will get turned off.

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The third and final tap gets turned on when you are too old to enjoy yourself and can’t physically/mentally do the things you used to enjoy. Eventually, this tap gets turned off and you’re gone — that’s the end of you.

Is your bucket going to run dry, will it overflow or will you have just enough?

A bucket running dry is not a good thing, but an overflowing bucket may be even worse because it means you didn’t do things when you could have. Things such as traveling or helping your kids when they needed help. Perhaps you ended up working longer than you needed to.

In other words, you don’t want to get to that final tap and realize you have the money, but no longer have the time.

What is going to happen to your bucket, Juliette? Is it going to run dry and what is the reason if so?

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Are you house rich and cash poor? If you don’t have time to add to your bucket before retirement, then you will need a strategy that uses the equity in your home to fund your lifestyle: downsizing, selling and renting, a reverse mortgage, etc.

Or are you spending more than your income, or perhaps not saving enough? Now is the time to get your finances organized, and the sooner the better.

Maybe you have enough money in your bucket and don’t know it with all the money moving in and out, the taxes you’re paying, and the different appreciation rates on your fixed and liquid assets. The problem with not knowing if you have enough is the fear of spending. You realize when you get to age 80 or so that you could have done something earlier in your life if you’d only known.

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Finally, it could be that your bucket is going to overflow with money and the sooner you know that, with confidence, the better.

Now, Juliette, let me ask you: Knowing that you’re thinking about retirement and that time is going by faster and faster, what do you want to do with the time you have left? Will 70 per cent of your working income cover it? What does your bucket look like and what actions do you need to take now, if any?

Allan Norman, M.Sc., CFP, CIM, RWM, is both a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only.


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