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Plan
Your Retirement Spending
Gordon
Pape
One
of the most difficult challenges of retirement is figuring out
just how much money you'll need to live on. But it's essential
to prepare a reasonable estimate, because that will help you determine
the amount you need to withdraw from your RRIF each year, as well
as from other sources.
There
are two ways to estimate your post-retirement income needs. Less
patient readers may use the quick and dirty method. This simply
involves using your current family after-tax income as a base
and multiplying by a target percentage.
The
question is, what percentage? Estimates of the amount of retirement
income needed to maintain pre-retirement living standards range
from sixty to eighty-five percent of your income in the final
year before you stop work.
Higher-income
people - seventy thousand dollars a year and up - may be able
to get by with a lower figure, in the sixty percent range, if
they are not planning to live elaborately. But lower-income earners
- those with pre-retirement incomes of less than forty thousand
dollars a year - may need eighty percent of their salary to maintain
their standard of living.
At
the outset, I recommend a target range of seventy-five to one
hundred percent of pre-retirement income. For purposes of this
calculation, I suggest you use eighty-five percent unless you
have especially extravagant retirement lifestyle dreams.
On
that basis, the quick and dirty formula would be: This Year's
Family Gross Income x 85% = Post Retirement Needs So if your family
income this year is fifty thousand dollars, you'd need forty-two
thousand five hundred dollars in today's purchasing power after
retirement to maintain your standard of living. Of course, if
you want to live even better, it will cost more. If you want a
more precise figure, you'll have to do some additional work.
Expense
Estimator
The
Expense Estimator that follows will help you make a more accurate
projection of your likely expenditures when you stop work. There
are some calculations involved, but I think you'll find it worth
the effort. I suggest you make extra copies before filling it
out, so you'll have some extra sheets for future updates. Before
you begin, you'll need to know approximately how much your family
is spending annually now in each category. If you don't have a
current budget, this is a good time to create one.
Use
today's dollars when completing the Expense Estimator. Leave taxes
aside, except for Canada Pension Plan and Employment Insurance
premiums.
Here
are some considerations to keep in mind:
Housing:
You may still be paying off a mortgage, but look into the future.
Based on the current amortization schedule, or on any mortgage
pay down plans you may have, will it be fully discharged by the
time you stop work? If so, the mortgage component can be eliminated
from your post-retirement spending estimates. Under utilities,
include the cost of heating, hydro, water, cable TV, telephone
(including long distance), Internet server, and any special costs
you may have, such as a water softener, water filter or security
system monitoring. The improvements and replacements line is to
cover the cost of renovations or new furniture and appliances.
Don't underestimate these expenses: many people like to spend
time after retirement fixing up their home or buying new furniture,
drapes and carpets.
If
your lifestyle plans call for you to move to a less (or more)
expensive home after retirement, adjust your spending estimates
accordingly. Do not include any allowance for profit you may make
on the sale of your Recreational property: You may not own a cottage,
Sunbelt condo, or vacation property now, but if you want one after
you retire you'll have to build in the costs. Many retirees buy
a place in the sun to spend the winter months. If this is part
of your desired retirement lifestyle, start planning for it now.
If you want a rough rule of thumb on the annual costs of carrying
such a property, assuming it's mortgaged, use fifteen to twenty
percent of your estimated purchase price. A condo in the Sunbelt
will usually cost at least as much to carry as a comparable residence
in Canada - what you save in heating bills you'll pay out in higher
costs for electricity, property taxes, and maintenance charges.
Food:
Your current food costs may not be indicative of what you can
expect to pay after retirement. Your children will probably have
left home by the time you stop work. Many people also find they
eat smaller portions as they age. Meals out may cost less, especially
if you and your spouse both work and have lunches away from home
five days a week. On the other hand, if your desired lifestyle
calls for more socializing and entertaining, budget accordingly.
Clothing:
If you and your spouse have to dress for work, whether it's in
an office or on a construction site, those costs will be eliminated.
You may have to build up your leisure wardrobe, but casual clothes
usually cost less than business wear.
Transportation:
For most people, the family car is the largest single expense
in this category. You'll almost certainly want to retain at least
one car when you stop work, so you'd better plan for it. Remember
to include all relevant costs: gas, oil, insurance, license, and
maintenance. I've also added a line for public transportation
(remember many communities offer seniors' discounts) and one marked
"reserve". This is for putting aside money to purchase a new car
every five years or so.
Health
care: This is a tough one to estimate. Your personal health
costs will likely be higher after you retire and you may not have
on-going group plan protection. Dental care and glasses may cost
more and you may have to purchase a hearing aid. However, if you're
currently paying large sums for health care - perhaps your daughter
just got braces on her teeth - the increase may not be overly
dramatic. Make inquiries about the cost of individual health insurance
for older people and include this in your post-retirement projection.
Personal
care: Cosmetics, hair care, perfumes, and the like all cost
money. Allow for it here. Also include any spending on tobacco
and alcohol on this line.
Life/disability
insurance: You shouldn't need as much insurance after the
kids have grown up, especially if you've built a solid retirement
plan that will comfortably support both you and your spouse through
the rest of your lives. Unless you want to use life insurance
to leave a big estate to your children, plan to reduce your costs
once you stop work. Disability insurance is valuable as long as
you're working, but once you retire there is no point continuing
it. Any money you're now spending on disability premiums can be
directed elsewhere.
Family:
Take a close look at what your dependants are costing you
now. If you have children in university, for example, you're probably
laying out thousands of dollars annually that won't be required
in a few years. On the other side of the coin, consider your parents
or other close family relatives. Are they in good financial shape,
or are they likely to need help from you in later years? Also,
don't lose sight of the grandchildren. They can cost a lot of
money in gifts and visits.
Travel:
If you want to see the world, or at least the sunny south, after
you retire, this is the time to start planning for it. If you
don't spend a lot on holidays now, this may be the component of
your budget that shows the largest percentage increase.
Recreation:
You're probably going to want to be active in your spare time.
So don't skimp here. If you're a golfer, you may want to join
a club (if you don't belong already) or purchase new clubs. Hobbies
can be costly - I happen to enjoy collecting fine wines and I
don't intend to give it up when I stop work. Many retirees like
gardening, which can be expensive. You may want to buy some compact
discs or rent movies. How about some nights on the town? Will
you be doing more reading? Do you plan to buy a boat? This is
your chance to do all those things you've complained you never
had time for, so make sure the money is available in your budget.
Pet
care: Many retired people like the companionship of a dog,
cat or other pet. If that sounds like you, put some money in your
budget at this line. Don't underestimate the cost. Vet fees can
be expensive and if your pet requires regular grooming the way
our shaggy Sheltie does, that will set you back fifty to seventy-five
dollars every month or two.
Debt
repayment: You may be servicing a lot of debt right now: credit
card balances, a car loan, investment loans, etc. Include the
annual interest cost of everything except your mortgage in the
Present Cost column. Your target should be to pay off all your
debts before retirement to reduce that outlay to zero, thereby
freeing up cash for other post-retirement needs.
Professional
services: You may need the services of a lawyer, accountant,
financial planner and/or investment counsellor when you retire.
Budget for those costs at this line.
Donations:
If you give regularly to charitable organizations, you'll want
to continue doing so when you retire. Include an appropriate amount
here. Canada Pension Plan/Employment Insurance: You're probably
paying several hundred dollars each year in premiums. This expense
will disappear when you retire.
Retirement
savings: You should be contributing several thousand dollars
each year to retirement programs, such as pension plans and RRSPs.
This is another outlay that will stop once you retire.
Other
expenses: Most people find they spend at least ten percent
of their income on items for which they can't readily account.
Make an appropriate allowance on this line. If you have any unusual
expenses, such as alimony payments, also add them at this point.
Gordon
Pape, Contributing Editor of fifty-plus.net, is one of Canada's
best known and most respected financial authors and commentators.
He is Publisher and Editor of the popular Mutual Funds Update
and Internet Wealth Builder newsletters.
©
October 2000 Fifty-Plus.net
Heather
Boon is an assistant professor in the Faculty of Pharmacy, University
of Toronto, and author of The Botanical Pharmacy. © July 2000
Fifty-Plus.net
http://www.fifty-plus.net/
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