10.1.9 Video: Estimating your retirement needs

Introduction

Retirement can be a glorious time of life. It can be a time of life when you explore activities and travel to places you have never experienced.

To get the most out of your retirement, you'll want to have a strong financial foundation to fund both your basic needs and those extra activities that you'll finally have the time to do.

But how much will you need? Let's find out what some people think.

Segment 2: Contextual background

Phase 1

For working people:

• Do you ever think about retirement?
• Do you think about what you will live on when you retire?
• How much money do you think you will need each year, either as a dollar figure or as a percentage of your current income?

As you can see, estimates vary widely. Now let's see what retirees actually think now that they're actually living it.

Phase 1

For retirees:

• Before you retired, how much money did you expect to need each year?
• How much money do you actually need?
• Biggest surprise in retirement or biggest surprises related to finances?

As you can see, people often underestimate their financial needs for retirement. To avoid this trap, let's take a look at how you can better estimate your retirement needs.

Segment 3: How much do you need to retire?

(Voiceover)

To begin with, you'll need to consider these key factors:

• The age at which you plan to retire
• The number of years you think you will have to fund your retirement
• The retirement lifestyle that you want to have

You'll also need to know that:

• Inflation will affect your retirement income by increasing the cost of goods and decreasing the value of your savings. So, you'll need to adjust for inflation when calculating your retirement needs
• And, most importantly, you'll need to start saving early in your working life.

Segment 4: Calculating the details

As a rough guide, to live comfortably in retirement most people will need about 70 per cent of the gross annual income that they earned during their three highest-earning years of full-time employment.

Let's dig deeper and figure out the details.

You can use the retirement worksheet at GetSmarterAboutMoney.ca to help you estimate your monthly expenses.

(Voiceover)

Start with your current monthly household budget.

You'll need to consider housing expenses (pause), utilities (pause), car expenses (pause), groceries and other expenses (pause), personal insurance (pause), financial expenses (pause) and income taxes.

In this example, let's say that your current monthly household expenses add up to $6,000 per month including a little extra for unexpected expenses.

Now, adjust expense categories up and down based on your retirement lifestyle. Let's assume that you save some money in housing expenses, but that you need additional money for travel in your retirement. In total, it looks like you'll need about $4,200 per month in retirement.

Now let's visit the Retirement Income calculator on the Services for Seniors page of the Service Canada website.

It will help you calculate the retirement income you can expect to receive from government plans and other sources:

• Old Age Security;
• Canada Pension Plan or Quebec Pension Plan;
• employer pension(s);
• Registered Retirement Savings Plans;
• and other sources of ongoing income

For example, after calculating your expected retirement income using the Service Canada calculator, you may find that you will be a little short of income to live the lifestyle you want. In that case, you will need to either save a little more, perhaps in your RRSPs, or adjust your retirement needs.

Conclusion

It's important to estimate your retirement plans in detail. Start planning and saving now. That way, you can build the financial foundation that lets you get the most out of your retirement dreams.