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Removing the mystery of how much is enough
One of the most frequently asked questions when meeting with prospective clients is, “How much do I need to retire?” The simple answer is: it depends. Many varying factors are considered for each situation. The hope is that this article will remove some of the mystery around figuring out how much is enough to retire and provide some steps to answer this question for your situation.
Boorrrriinnnggggg… Right?!?! This is a step most of us (me included) would like to avoid. The reasons vary, but I would estimate only 5% of clients actually budget. Tracking expenses…maybe another 5-10% could be added to that number. BUT this is the most crucial step to figuring out how much is needed to retire.
Trust me on how necessary determining your current spending is. Be honest with yourself and include all expenses. It can hurt, to be honest about how much we spend in a year, BUT if you’re not, the only one you are hiding it from is yourself. What have you got to lose?
Here is a quick way to help you determine your monthly spending:
Do this step and then move to Step 2.
Want a helpful spreadsheet to work with? Click HERE to download our Excel budget worksheet.
Take the information gathered in Step 1. There may be things you may want to add or remove from your current lifestyle in retirement.
Remove: Look at your current spending and remove all the things that should be gone when you retire. Consider removing: RRSP contributions, savings, disability insurance, mortgage payments, etc.
Add: Include expenses that may increase. Consider increasing: travel, medical expenses, and gifts.
Look at the additions from the lifestyle change considerations in Step 2 and add in the new costs based on research and educational insight.
Now total it all up (in today’s dollars).
The industry standard income assumption is typically 70% of pre-retirement income. However, we have found this oversimplifies the matter since several factors must be considered.
The industry standard income will give you a ballpark, but working through the steps will give a more accurate picture.
This is where things can get a bit more complicated, and the help of a financial professional with software can help. They will want to know the following:
If you want to play with the numbers without talking with a professional advisor, you can run a basic calculation with some online calculators. The Sunlife Retirement Savings Calculator (click the link and try it for yourself) is one example that discloses its assumptions and keeps it pretty simple to get a ballpark amount that you would need to retire.
This is a very important point. There are several assumptions that planners and online retirement calculators make to project the dollar amount needed to retire. Financial Planning Standards set these assumptions each year, and you will want to know what these assumptions are. The FP Canada Standards Council publishes an annual Projection Assumptions Guide (click here to view the 2023 assumptions) to help financial planners make realistic financial projections.
Some of the important assumptions to look for are:
No two client situations are the same. Be honest with yourself when you walk through the exercise. Know your assumptions. Talk with a financial professional. Review the plan regularly, as reality rarely matches the assumptions and adjust the plan as you go. Remember, Financial Planning is a verb.
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting-edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.com
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