No matter if retirement is a long way away or potentially happening very soon, you need to have a plan in place to determine how much you need to save to have the retirement you want. But, it can be hard to set-up a retirement savings plan if you aren’t actually sure how much you need to save in total. Some experts say you need at least $1 million, others say more…but what is the answer?
Here are some ideas to start you down the path to determining how much you really need to save for retirement and a few steps to get you started on your saving journey.
And if you’re still not sure, why not book an appointment with a financial advisor at your local credit union to talk about your retirement goals and make a plan?
Write down your retirement dreams and goals
Start by imagining what your dream retirement age is and what kind of goals you have for when you retire. For example, if your plan is to travel, spend time with family, go back to school or focus on health and wellness, this will impact what your retirement savings plan needs to look like.
Next, write these goals down and think about a realistic retirement age to achieve them. Next, you can start to work backwards from the age you are now to your goal age for retirement to determine how long you must save for.
Also keep in mind that “retirement” looks different for everyone. Maybe your goal is to be 100% done working at a certain age, or maybe you’re interested in continuing to work part-time later in life. Considering these factors can also help you plan.
Map out your potential expenses
Next, take some time to think about what expenses you will have when you reach retirement age. We’ve already seen what inflation can do to the cost of living, so it’s a good idea to plan for higher prices for everything than what you’re paying now. Think about all the costs you have each month, including housing, utilities, groceries, food and transport.
And don’t forget to factor in potential medical costs – even if you’re in excellent health by the time your retire, you will need funds to potentially cover a private health plan once your employer benefits are gone or to cover things like prescription drugs, eyeglasses and dental fees out of pocket.
Remember to also include emergency funds in your plan as well. You want to be sure that if you’re suddenly faced with vehicle or home repairs that you’ve got funds set aside to cover costs without taking on extra debt.
Look at income
Once you have a sense of how much you’ll have to pay each month when you are retired, next you can think about potential sources of income. Do you have a pension fund? If so, determine how much it will pay out each month and add that as income. Maybe you have investments or a Registered Retirement Savings Plan (RRSP) you can withdraw from, so factor this into your income total as well. Just make note that some of these withdrawals will incur taxes when your take them out, so you may need to take that amount off the top.
Finally, look at how many years of work you have left and determine how much you can save each month while working for retirement. The earlier you can start saving the better, as then you can take advantage of compounding interest.
Get creative
If your retirement isn’t looking to be quite on track, there could be some options you can try right now to accelerate things. Maybe you can cut down on incidental expenses each month and sock more money away for the future. Maybe you can take on odd jobs, start a side hustle or switch careers to make more income now and put it towards retirement savings.
Other options include selling your house when you retire and downsizing to a less expensive living arrangement like a condo or a townhouse. In some cases, moving to a smaller community with lower housing costs or property taxes can help as well. You could also look at ways of topping up your retirement savings such as increasing RRSP contributions or contributing to a tax-free savings account.
Don’t wait
Common wisdom is that, when possible, your 20s and 30s can be focused on things like paying down debt and getting established, whereas in your late 30s and 40s your financial attention should shift to focus on saving for retirement. But the sooner you can start saving, even if it’s only a small amount each month at first, the better set-up for retirement you will be.
And there’s also something to be said for not waiting to retire to follow your retirement dreams, whatever they may be. Excited to travel the world when you retire? Maybe you can get book an extended holiday and get some travelling done now or try working remotely from somewhere new. If your retirement goals include going back to school, learning a new language or trying a new sport, what’s to stop you from trying these things today?
Finally, think about what you like – and don’t like – about working. Maybe with a different position or a new company, you’d be more open to working longer or transitioning to part-time before you retire, extending how long you make an income.