You want to live a long and fulfilling retirement? You'll need sufficient funds to do all you want to do for the early years, and pay for medical care not covered by provincial health insurance in the later years.
If you still have a number of years before you plan to retire, you should evaluate where you are with your retirement savings and set the financial goals you need to meet to afford to retire comfortably.
But the first step for planning the rest of your life is knowing where you are today.
An inventory of your money
Many people don’t have a clear idea of how much money they actually have. Finding out how much you can have for retirement starts with adding up the value of all your current assets.
Assets are cash, investments, such as RRSPs, locked-in accounts and investment accounts. Also include the value of real estate property such as your home and cottage. Other assets include the cash value of life insurance.
Then include your liabilities such as mortgage balance, line of credit and loans. Get accurate numbers by referring to account statements. If you can't locate a recent statement, contact the financial institution or access your account online. The bank holding the mortgage can provide the amount of your mortgage balance. Be realistic about how much of your home equity might be worth.
Count only money earmarked for retirement. You should exclude emergency funds and money set aside for your children's education.
Knowing how much you have today, you can now estimate how much you can expect to have at retirement.
Diversify your investment and spread your risk
With your money inventory at hand, determine your asset allocation by adding the current value of each type of investments in basic categories. Here are common asset classes for Canadians:
- Cash, GICs, money markets
- Bonds and fixed income investments and funds
- Canadian stocks and mutual funds
- U.S. stocks and mutual funds
- International stocks and mutual funds.
Compare the current allocation of your assets to the investor profile that matches your risk tolerance and the time horizon of your investments. If you don't know, complete an investor profile questionnaire from a reputable Website (including this site).
You can expect different rates of return to apply to each of the different types of savings.
This is why you asset allocation decisions are so important. Higher expected returns mean more risk and more volatility. More risk means a greater chance of achieving low or negative investment returns.
Your risk of loss is reduced by investing in a variety of asset classes and individual investments. The ultimate diversification strategy for equities is an index fund, which is a fund that invests in the same securities and in the same proportion as the stocks of a market index, such as the TSX Composite.
On the other hand, inadequate diversification by having too much money in one or a few types of investment is rarely a good idea. One bad outcome can devastate your portfolio.
How much you'll need for each phase of retirement
All the money we are trying to save up is for one purpose: having sufficient funds to stop working and living off our assets. You can expect that you and your spouse's retirement will last a long time. The longer you have to plan for, the more uncertainty there is.
If you figure out what it takes, you can then start figuring out how to get there. You need to determine what will be your expenses during retirement. Your expenses will change over time because of inflation and because of life pattern.
Early on, you'll spend more on traveling, hobbies, and lifetime dreams. As you age, it is likely that more of your budget will go toward medical expenses.
Start with day one for your retirement budget.
You can think of retirement consisting of three periods. The first part is the active period: travel, sports, hobbies, and the good life. This could be between age 65 and 75.
The second period is the sedentary period: less travel, more time around the house and around town. This would typically be between age 75 and 85. If you're reasonably healthy, your expenses will actually go down.
In the third period you will need more services, particularly for assisted living and health care expenses. Expenses will typically be higher during this time.
You don't know exactly how and when you will go from the first to the second to the third period, but it is reasonable to assign 10 years for each period as a starting point.
The variation in the expenses for each period depends on the difference in the lifestyle you're hoping to live.
Another aspect to consider is the split between essential and discretionary expenses, and the expenses
you need to cover as a couple and if only one spouse is alive.
Inflation is a major factor in determining how much money you will need in retirement since even a modest inflation rate adds up to a big difference over time. Medical costs have risen faster than inflation over the last 20 years, and this trend is expected to continue indefinitely. Provincial health care does not cover everything. For most, drugs and many hospital services, including long-term care must come out of our own pocket.
Do not forget about vision and dental care, which are not covered and will be a continued expense for the rest of your life.
Where and how will you live?
Your future housing needs must be a top priority. You must have an idea of how this will play out, because expenses related to housing is an important component of the budget. If your mortgage is paid off, you still have to pay for heating, utilities, property tax, and maintenance and repairs.
Eventually, your house will no longer be adequate: too many rooms, too many stairs and too much maintenance. You will have to consider other types of housing. Retirement living facilities, designed for reasonably healthy older people, often commands high rental costs. Where more assistance is required, costs can be prohibitive.
This is where long-term care insurance can make sense. It can protect your assets by paying for medical care in a nursing home
Premiums vary by the features you choose, such as the amount of daily benefit paid and inflation protection. If you're considering a policy, get advice from a professional, because long-term care insurance is complex and each product is different in their coverage.
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