Determine how much you need to save for retirement

Transcription

1 Determine how much you need to save for retirement Knowing what you hope to accomplish in retirement will help you understand how much you need to save. The following calculations will help you determine just how much you ll require to fulfill your retirement goals. Some helpful hints to keep in mind as you complete your calculations: Don t be intimidated by the calculations they aren t as scary as they look. Follow the example to help you with the calculations. Include all household savings and income (from you and your partner) for a more accurate picture of your current and future financial situation. Calculation A How much income will I need when I am retired? How much you need to save for retirement depends on what you plan to do in retirement. Some choices are more expensive than others. The 70% rule of thumb is based on your current gross income. Is the 70% rule of thumb right for you? Use the budget template to help you create your retirement budget. Financial planners often use the 70% rule of thumb as a guideline to determine how much money to save. You ll need 70% of your current gross before tax income to live comfortably. For example, if your current gross income is $50,000, you could live on a gross retirement income of $35,000. Will this guideline work for you? It depends on what you plan to do during retirement and how old you are today. If you re between the ages of 20 and 39, this rule of thumb should provide a preliminary target for your retirement savings. However, the more specifics you (or your financial advisor) build into your retirement planning, the more confidence you will have in the retirement plans you make. If you are not sure whether 70% of your current gross income will provide enough income for your retirement lifestyle, create a retirement budget to estimate how much you need to save. Estimate the retirement income you will need. Your current before-tax income Percentage of income you estimate you ll need in retirement Result of Calculation A Robin, age 35, has an before-tax income of $50,000. Using the 70% calculation, Robin estimates that she needs an retirement income of $35,000 in today s dollars. $50,000 x 0.70 = $35,000 1

2 Calculation B Government benefits and other sources of retirement income Government Benefits Currently, the maximum benefit from government pension plans and Old Age Security is approximately $18,000. Other sources You should take into account other known sources of income you and/or your partner will receive at retirement. These might include: rental income, home-based business earnings, life insurance proceeds, defined benefit (DB) pension income, or inheritance proceeds. At this point, you should not include income you are expecting from existing registered savings, such as: registered retirement savings plans (RRSPs), defined contribution (DC) pension plans, deferred profit sharing plans (DPSPs), or non-registered savings plans (NRSPs). You ll add these in later. All estimates are in today s dollars. You ll include the effects of inflation later. + Estimated income you ll receive from government benefits = Estimated income you ll receive from other sources Result of Calculation B Robin is counting on some government benefits to provide support in her retirement. She estimates she will receive $10,000 each year from government benefits and nothing from other sources. $10,000 + $0 = $10,000 2 Government Benefits include two main programs: The Canada Pension Plan or Quebec Pension Plan (CPP/QPP), and Old Age Security (OAS). A Guaranteed Income Supplement (GIS) is available for people who have a very low income.

3 Calculation C How much income will I need from personal savings? Subtract the amount you determined in Calculation B from the amount you determined in Calculation A to estimate the extra retirement income you ll need to provide through your personal savings. = Calculation A Calculation B Result of Calculation C Robin estimates she will need to provide an before-tax income of $25,000. She calculates this by subtracting Calculation B from Calculation A. $35,000 - $10,000 = $25,000 Calculation D The impact of inflation To get a better picture of the amount you need to save, you should also consider the impact of inflation. Look at the below and select a factor based on the number of years before you retire and the rate of inflation you expect. Average Years to retirement inflation rate* Inflation, or the rising cost of living, is the reduction in the purchasing power of one dollar over time. Inflation is an important factor to consider when planning your retirement. The higher the rate of inflation you use in your calculations, the more money you will need to save. 2% % % % *Note: From , the fifteen-year average of the inflation rate was 2.60%. Choose a factor from the chart to calculate the additional money you need to save as a result of the impact of inflation. Calculation C Result of Calculation D By using an inflation rate of 3% over 30 years to save until retirement, Robin calculates the additional retirement income she ll need to fund prior to retirement is $60,683. $25,000 x = $60,683 3

4 Calculation E How much will I need to save? Now it s time to estimate how much money you need to save to generate the retirement income needed to achieve your retirement goals. The amount you need depends on two important factors: how long you expect to be retired, and the rate of return you expect your investments to yield once you are retired. Use the following to determine how much money you need at a given retirement age, to provide an income until age 90. The factor you use will depend on the rate of return you expect to earn on your investments after you retire. Expected Retirement age rate of return* % % % *Note These rates of return are conservative. When you re retired, your primary concern is preserving your investment and maintaining a modest stream of income. Calculation D Result of Calculation E Assuming Robin retires at age 65, Robin estimates that she will need total accumulated savings of $735,393 assuming an average rate of return of 4% until age 90. $60,683 x = $735,393 Calculation F The value of your current investments Now it s time to calculate how much your current investments will be worth when you retire. Include savings you have accumulated in: Registered retirement savings plans (RRSPs), Defined contribution (DC) pension plans, Deferred profit sharing plans (DPSPs), or Non-registered savings plans (NRSPs) you intend to use for retirement purposes. 4

5 Calculation F Continued Select the appropriate factor from the using your years until retirement and the average rate of return you expect to earn on your investments until you retire. Expected Number of years until you retire rate of return % % % % Your current savings Result of Calculation F Currently, Robin has $25,000 in RRSPs. With 30 years until retirement, and an anticipated return of 6%, she can expect $143,575 from her existing RRSPs. $25,000 x = $143,575 Calculation G Your retirement savings gap This is the difference between what you need to save and what you ve already saved. Subtract the results of Calculation F from Calculation E. = Calculation E Calculation F Result of Calculation G When Robin subtracts the future value of her existing RRSPs from her estimated accumulated savings, she realizes she has a shortfall of $591,818. $735,393 - $143,575 = $591,818 5

6 Calculation H Your monthly savings goal To estimate how much you should save each month, consider how long you have to save it (the number of years until you retire) and what rate of return you expect to earn on your investments. Use the chart below. Expected Number of years until you retire rate of return % % % % Calculation G Result of Calculation H With 30 years until retirement, and assuming a 6% rate of return, Robin estimates that her monthly savings should be $ per month. $591,818 x = $ Just like an check-up with your doctor, it s a good idea to review your retirement plan ly, or at least when you have a significant life event such as marriage, a child or a new home. For additional information, please contact your CBAF Representative by calling a