Determining Your Cash Flow In Retirement

If your retirement date is approaching, are you ready for this major life change? Your regular paycheque will be ending, and your income must come from other sources.

By now you should have some idea of how you’d like to spend your retirement – what activities you will enjoy; where you will want to live. So, how much money will you need? Where will it come from?

If your employer offers pre-retirement planning, take advantage of this service. At the very least you’ll get a better understanding of your company pension and any benefits you may still be able to keep.

If you want to develop your own retirement plan work through the calculations found on such credible sites as the Government of Canada, and Get Smarter About Money.

Determining your cash flow in retirement

Your retirement financial plan begins with estimating your cost of living and working out a budget to determine how much income you will need. In early retirement, travel and entertainment are often major budget items.

Later on, you may need to budget for medical expenses and assistance for daily living. A few years into retirement you’ll pretty much know what your spending patterns are.

Related: 5 things missing from your retirement budget

Next, total up the income you will be receiving that is considered guaranteed. Falling under this category are the Canada/Quebec Pension Plan (CPP/QPP), Old Age Security (OAS), and a workplace defined benefit pension plan (if applicable).

An estimate of CPP payments is available in your My Service Canada Account. The closer you are to retirement, the more accurate it will be.

Subtract your guaranteed retirement income from your proposed spending budget. You’ll want enough to pay your basic expenses with some money left over for fun stuff. For many people, this guaranteed income will be insufficient, and the difference will most likely come from your RRSPs, TFSAs and other savings.

Will your retirement savings be large enough? Or will you need to reconsider your plans?

Practice living on your retirement income

If your retirement income is something like 70% or 80% of your current income, test it out now. Could you live on less? You don’t really know unless you try it out.

Final thoughts

The couple of years before retirement is a crucial time from a planning perspective. CPP and OAS applications may need to be submitted, income streams have to be consolidated, and portfolios need to be optimized for both income and growth.

Smart retirees take the time to create a retirement plan, instead of leaving it to chance.