Half a lifetime ago, my friends and I all seemed to be struggling with the question: "Is this the right career for me?"
These days, for people of my vintage, the questions have changed. Now, I often hear:
- How much money is enough to retire on?
- How long does my money need to last?
The 4% rule
You may have heard of the "4% rule," a rough guide for making your retirement income last for 30 years by drawing down only 4% of your savings each year. There's controversy about whether it will work in the future: The rule was developed in an era of higher interest rates, when you could expect higher returns from the fixed-income portion of your portfolio, and it doesn't allow for different income needs at different stages of your retirement. Even right now, I can tell you two of its shortcomings:
- It doesn't tell you if you've saved enough money to retire on (i.e., you may not be able to live on 4% of your savings per year).
- It doesn't tell you how long you'll live, which drives how long your retirement income needs to last.
So I asked Sun Life Financial advisor Andrew Wilkin,1 from Waterloo, Ontario, how to find answers to these tough retirement questions.
How much income will you need?
"If someone is trying to find out how much income they'll need in retirement, the first thing to understand is how much income they need today," Wilkin says. "I'm a financial planner, so I ask people about their finances. Usually, people know how much money they make, but they can't tell me how much they're spending."
So, before calculating how much retirement income you'll need, he suggests you start by tracking how much you're spending today – and what you're spending it on. Ideally, do that for a year or two.
But if you're forced to retire by poor health or job loss before you can do any long-term tracking, Wilkin suggests you do the next-best thing: Use recent bank statements, credit card statements and receipts for contributions to RRSPs and tax-free savings accounts (TFSAs) to get a summary of how you're spending and saving.
Next, adjust for what you expect will change once you're retired. For example, you might save $100 in gas and $50 in car insurance a month when you no longer commute to work. You'll probably spend less on clothing as well. If you play golf or like to travel, you'll probably spend more on those things. And if you're like me, you'll want to eat out more.
Once you estimate how much income you'll need in retirement (Sun Life's Retirement savings calculator can help), a financial advisor can help you consider how a variety of other factors could affect your situation, such as inflation, expected investment returns, your tolerance for risk and how your money is invested today. This annuity calculator will give you an estimate of the guaranteed retirement income you could have with an annuity.
How long does your money need to last?
Nobody knows for certain how long they will live, but factors such as sex, current age, weight and activity level can be used to produce a rough estimate. Sun Life's Life expectancy calculator is just one of many free longevity tools available online.
Here's an important note: The calculator will give you a number for the average life expectancy for someone in your situation, but you still have a 50/50 chance of living longer than that. Personally, I'd never accept a 50% risk of running out of money! Also, if you have a spouse or partner who survives you, remember that your money needs to last as long as your partner's lifetime.
How an advisor can help
Before I retired, I led Sun Life's market research department and learned a lot about what Canadians already retired and near retirement value or fear about retirement.
So I wasn't surprised when Wilkin told me that when he works with people planning to retire, he calculates their basic ongoing living expenses: food, accommodation, taxes, basic transportation, etc. Then, he recommends combining income from guaranteed products such as annuities, GICs and segregated fund products with payments from the Canada/Quebec Pension Plan, to ensure that money will never run out for those basic living expenses. Next, he recommends other ways to create retirement income intended for discretionary expenses or lifestyle choices such as leaving an inheritance, renovating a home or travelling the world.
In their youth, most people shy away from talking about their money or their mortality. But Wilkin says those planning for retirement are more open to discussing such taboo topics. Is it time for you to break a taboo and get answers to your retirement questions?
Find out more about retirement planning with Money for Life.
1. Andrew Wilkin, CFP, CLU, CH.F.C., CHS, Cowan Wilkin Financial, Sun Life Financial advisor.
Mutual funds offered by Sun Life Financial Investment Services (Canada) Inc.
Sun Life Assurance Company of Canada is a member of the Sun Life Financial group of companies.