Regardless of your stage in life, you’re never too young to plan for your retirement. With most people retiring at 60 or 65 and the average life expectancy at 78 to 80, the average length of retirement is about fifteen to twenty years. That is a lot of time to decide the kind of retirement you want.
In general, you need a retirement income of about 70% of what you earned before you retired to maintain your pre-retirement lifestyle. While this suggestion can be helpful, they say little about the retirement you want. Or how to get there.
Retirement will look different for every one of us. We don’t all want to play golf six months of the year. And, if longevity runs in your family, you could be looking at a retirement of 30 years or more. With that in mind, it pays to plan for your retirement. Here are the steps to creating a great retirement.
It All Starts With A Vision
The first thing you need before you start running 'the numbers' is a vision. You need a clear vision of the kind of retirement you want. What can you picture yourself doing during retirement – Spending more time with the grandkids, traveling, working part-time?
Are you hoping to do the items on your bucket list? Hot air ballooning in the Serengeti or sailing the Galapagos Islands? Or maybe retirement will give you the time to complete a novel. It is a chance to do all the things you had put off for years, such as fixing up the house.
Write a list of things you’d like to do during retirement.
How much is it going to cost?
Once you have an idea of the kind of retirement you want, now you can research how much it’s going to cost—traveling twice a year? Local or international trips? Bali or Hawaii? Maybe traveling for you would involve an RV. Would you want to buy an RV and travel throughout the country or rent one for the occasional camping trip?
Considering living in Mexico for six months of the year? How much is that going to cost?
Depending on how you anticipate living out your retirement, one vision may require an income of $50,000 per year, and another may require more than $100,000. To get an accurate picture of what your retirement will cost, look at your current expenses.
Many of your current expenses will remain well into retirement. Such as food, annual visits to the dentist, and car insurance. Now, add to your current expenses the amount you anticipate for the vision you have for retirement.
How Long Do You Have to Save?
Once you know how much it will cost you to maintain your retirement, you will need to calculate what you will need to save towards that vision. Many online calculators can help you calculate the amount needed to save towards retirement.
How long do you have till retirement? The more time you have till retirement, the more you can benefit from the effects of compounding. And the earlier you start saving, the better.
Your Sources of Retirement Income
In planning for your retirement, you need to know all your potential sources of income during your retirement.
Public pension system
In the US, the Public Pension Plan is Social Security. And in Canada, it’s The Canada Pension Plan. Your retirement amount from Social Security (retirement benefit) is based on how much you paid into Social Security while working and the age at which you claim benefits.
The estimated average Social Security retirement benefit in 2021 is $1,543 a month. The most an individual retiree can get — is $3,148 a month.
Similarly, for The Canada Pension Plan, the amount an individual can receive is determined by the length of time a person has been working and their income while employed.
The maximum amount a retiree can receive from CPP is Cdn$1,203.75 per month.
Employer pension plans
Most employer pension plans are either defined contribution plans or defined benefit plans.
A defined contribution plan is when the employer and employee both make regular contributions to the program. A defined benefit plan is predetermined by a formula based on the employee’s earnings history, tenure of service, and age, rather than depending directly on individual investment returns. Many governmental and public bodies and a large number of corporations provide defined benefit plans.
Your employers’ human resources department will be able to provide you with information about their pension plan and an estimate of what you can expect at retirement.
Continued employment
In 2018, almost 26% of seniors in America aged 65 to 74 were employed.
More seniors are returning to work in retirement. With increasing life expectancy, this phenomenon called unretirement is growing in popularity. Many seniors return to work for non-financial reasons. But continuing to work in your sixties and seventies is another source of income.
The “gig” economy is not exclusive to Millennials. Many retirees are making passive income working online either as consultants or marketers.
Registered retirement savings plans
Registered Retirement Saving Plans include vehicles like IRAs, 401(k)s, and annuities in the US. A survey by Pension Rights Center found that 66 percent of retirees in America currently receive income from these types of financial assets.
A 401(k) is a retirement account offered by an employer. Whereas an IRA is an individual retirement account (IRA) that you establish on your own.
There is a maximum amount you are allowed to contribute to these plans each year. A significant part of retirement planning is to maximize your contributions each year as much as possible.
The greatest advantage to these plans is that they allow you to grow your retirement investments while not paying tax on the growth until you take the money out. You can hold many types of investments, such as mutual funds, ETFs, bonds, and stocks.
Financial Assets in non-registered accounts
These savings comprise of after-tax money you’ve put away that is not in any registered retirement account. You have greater flexibility with the money you have saved outside of any retirement plan. Flexibility to withdraw funds without the same tax implications as a retirement plan.
Reverse mortgages
Some retirees are choosing to supplement their income with a reverse mortgage, also called a home equity conversion mortgage. Designed for older homeowners, it is a loan secured by the equity in your home. The loan is paid back once the house is sold.
This is different from simply taking equity out of your home through a refinance. It is important to read the fine print if you are considering this option.
Pay off debt
Generally, your earning capacity is diminished at retirement. Planning for your retirement should include a plan to pay off as much debt as possible while you’re still employed unless it is a tax-deductible debt you are carrying.
Downsizing
At some point in your retirement, you may consider downsizing. If you live in a city that has experienced an explosive increase in real estate prices, a substantial amount of equity lies in your home. Should you downsize to access the equity in your home? That depends on your other sources of retirement income.
Your home is, however, part of your retirement plan. There may come the point where you may not be able to manage a home. And may want to use the equity to pay for long-term care.
Living Abroad
To ensure their retirement funds go further, a significant number of North Americans are retiring abroad to places with a lower cost of living. Mexico, Costa Rica, and Panama are popular destinations with retirees. Some of these countries have generous immigration policies to attract foreigners.
There are numerous things to consider if this is part of your retirement plan. Would you buy a property there or rent one? What are the rules around immigration, homeownership, and health care coverage?
Maybe, your intention is not to move permanently but to live part of the time in a different country. Again, health care coverage is a serious consideration as you get older.
Health Care
Health care should be a significant part of your retirement plan. While employed, you may have benefitted from coverage through your employer. In retirement, this may be reduced or stopped altogether. And what about long-term care? How will you plan for this?
Reducing Investment Risk
Retirement Planning should involve reviewing your investment portfolio to reflect your changing income needs. If you intend to draw from your retirement investments, you should move to a more conservative mix and reduce the portion of your assets in risky securities. You do not want to be in a place of having to sell off your investments during a prolonged market downturn to maintain your lifestyle.
Bringing It All Together
Retirement will look different for each person. And retirement is much more than money, With a clear vision of how you’d like it to be and what it’s going to cost, retirement could be the best time of your life. Get the help of a financial advisor to put together a retirement plan for you. You’re never too young to start.
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This article was written by Jennifer Thompson