With the Feb. 29 deadline for RRSP contributions fast approaching, retirement is on the minds of many Canadians who are thinking about their financial futures.
But how much does someone actually need to retire? Some may have heard of the 70 per cent rule: assume you need 70 per cent of your working income when you reach retirement.
But financial experts say the first thing to remember when it comes to retirement planning is throw all the “rules” out the door.
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“They key thing is that rules of thumb unfortunately don’t work,” said David Trahair, a certified professional accountant in Toronto. “They don’t work because each of our personal financial situations is as individual as our fingerprints.”
He said while 70 per cent might be right for one person, it might be completely wrong for another.
Trahair is author of the upcoming book The Procrastinator’s Guide to Retirement: How you can retire in 10 years or less. His advice is to focus on your spending.
“The much more accurate way of determining how much you’re going to need to save for retirement is to focus on your expenses,” he said. “Focus on your current spending and then and only then can you make a projection as to approximately how much you are going to be spending each year in retirement.”
Several banks also offer “retirement calculators” to help estimate how much you will need in retirement.
For example, a person who is 30 years old with a yearly salary of $50,000, wants to retire at 65, will need $984,889 saved assuming they plan to retire for 25 years, while spending $45,000 a year.
The two main building blocks for retirement are $13,000 a year from the Canada Pension Plan (CPP) and $7,000 from the Old Age Security (OAS) benefit.
Retirement can involve travelling, children who need support, or a period of long-term care, which could mean spending more in retirement than when working, says Trahair. He adds that the “wildcard” of life expectancy can also affect how much you need to save.
Beth Hamilton-Keen, director of investment counselling at Mawer Investment Management Ltd. and global chair of the CFA Institute, said it’s important for each person to consider what they want their retirement to look like.
“The flaw that I see in that 70 per cent rule is it’s just a starting point for somebody who hasn’t thought about retirement,” said Hamilton-Keen. “There is a human behavioural aspect where you basically live what you can also afford.”
She also advocates getting into the habit of saving, so whether it is a new baby, a divorce, the loss of a job or a health issue you are prepared. She adds that people need to be realistic about their “altruistic measures.”
“Often once you get to [retirement] you have charitable interests that crop up that you really want to contribute to,” she said.
Many of her clients often need to set aside money for what she calls “independent dependents,” the children or grandkids who may need a loan for a down payment on a house or money for tuition.
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