How To Think About Retirement Planning

How To Think About Retirement Planning

We all need to think about retirement planning at some point in our lives. Relying on rules of thumb like saving 10% of your income or withdrawing 4% of your savings can get you part way there. But it’s also important to think about what retirement will look like for you. When will you retire? How much will you spend? Do you want to leave an estate? Die broke?

Here are some ideas to help you think about retirement planning, no matter what age and stage you’re at today.

Understand Your Spending

Much of retirement planning is driven by your spending needs and so it’s crucial to have a good grasp of your monthly and annual spending – your true cost of living.

Of course, any plan that looks beyond one or two years is really more of a guess. What is your life going to look like in five, 10, or 20 years? How long are you going to live, and are you going to stay healthy throughout your lifetime?

We don’t know and so we use assumptions and rules of thumb to guide us. First, think of when you want to retire – is it the standard age of 65, or are you looking at retiring earlier or later? Then, it’s helpful to know that while life expectancy in Canada is around 82 years, there’s a significant chance that you’ll live much longer than that – so perhaps planning to live until age 90 or 95 would be more appropriate.

We’ve heard all types of rules of thumb on retirement spending, but the consensus seems to be that you’ll spend much less in retirement than you did during your final working years. You’re no longer saving for retirement, the mortgage is paid off, and kids have moved out.

In my experience, most people want to maintain their standard of living as they transition to retirement and so you might want to use your actual after-tax spending as a baseline for your retirement planning. Note, this does not include savings contributions or debt repayments, but your true cost of living that will carry with you from year to year.

Now you know your expected retirement date, your annual spending, and a life expectancy target – three key variables in developing your retirement plan.

How Much Do You Need To Save?

I remember using an online retirement calculator when I was younger and feeling depressed when it told me I needed to save thousands of dollars a month to reach my retirement goals.

The fact is, you do need to save for retirement and the best way to start is by setting up an automatic contribution to come out of your bank account every time you get paid. You’re establishing the habit of saving regularly rather than focusing on a “too-large-to-imagine” end result.

Treat retirement savings like paying a bill to your future self. You need to pay your bill every month or else “future you” won’t be happy.

There’s great research around automating contributions and also around increasing your contributions whenever you get a raise, bonus, or promotion. Remember, if you contribute 10% of your paycheque when you earn $60,000 per year but then get a raise to $70,000 per year, if you’re still saving $6,000 per year that’s now just 8.5% of your salary – not 10%.

Give “future you” a raise too.

It’s also important to remember that life doesn’t work in a straight line – we don’t just contribute a set amount and earn a consistent rate of return every single year. Our savings contributions could be put on hold for a period of time while we pay off debt, raise kids, or focus on other priorities. You could get a large bonus one year, but then no bonus for the next three years. Investment returns are also widely distributed and so instead of earning 6-7% per year you might get 12% one year, 5% another year, or lose 10% one year.

Don’t get discouraged if you don’t meet your savings targets one year because of some unforeseen expense. Life happens.

Forget About Age-Based Savings Goals

Estimating retirement spending in your 20s or 30s is a pretty useless exercise. Again, we don’t know what our life will look like five, 10, 20 years down the road.

Here are the four areas that young people should focus on in their accumulation years: to

  1. Understand how much you spend and where all of your money goes.
  2. Focus on spending less than you earn (or earning more than you spend).
  3. Establish both short- and long-term financial goals. It makes no sense to pour all of your extra cash flow into an RRSP, for example, if you plan on buying a car or getting married in 1-3 years.
  4. Set up automatic contributions into a long-term investing vehicle – a percentage of your paycheque that you can reasonably afford while still meeting all of your current expenses and short-term goals. This doesn’t have to be 10% but strive to increase the amount each year.

Many young investors want to know how they’re doing compared to their peers. I don’t think it’s useful to use any age-based savings goals as a benchmark or guideline. We all come out of the starting gate at different ages and with different circumstances.

Focus on being intentional with your money and establishing a savings habit early. Remember, this is about you and your retirement planning.

That said, once you get into the retirement readiness zone (say 3-5 years away from retirement) you should have a good grasp of your expenses and also the type of lifestyle you want to live in retirement. Your spending will drive your retirement planning and projections, so this is a critical piece to nail down.

Investing In Retirement

Investing has been solved in a sense that the best outcomes will come from staying invested in a risk appropriate, low-cost, broadly diversified portfolio of index funds or ETFs.

It’s never been easier to invest this way. Self-directed investors can open a discount brokerage account and buy a single asset allocation ETF. Even investors who choose to remain at their bank can insist on a portfolio of index funds.

That’s great in the accumulation stage, but what about investing in retirement? Besides potentially taking some risk off the table by changing your asset mix, not much needs to change.

Self-directed ETF investors can simply sell off units as needed to generate retirement income, or switch to an income producing ETF like Vanguard’s VRIF. Robo-advised clients can work with their portfolio manager on a retirement income withdrawal strategy.

The biggest difference might be a preference to hold a cash buffer of one-to-three years’ worth of spending (the gap between your guaranteed income sources like a workplace pension, CPP, and OAS, and your actual spending needs).

What About Unplanned or One-Time Expenses?

An emergency fund can be useful in retirement to pay for unplanned expenses. But, for routine maintenance and one-time expenses that come up every year, these should be built into your annual spending plan and budgeted for accordingly.

Your cash flows change in retirement as you move from getting one paycheque from your employer to receiving multiple sources of income, like from CPP and OAS (steady monthly income), maybe a workplace pension, and then topped-up by withdrawals from your personal savings. You may find that you need a large cash balance in the early stages of retirement while you adjust to your new reality.

Large expenses like a home renovation or new car should be planned for in advance and identified in your retirement plan so that appropriate funding is in place ahead of time.

Major unplanned expenses may require a change on the fly – and so using a home equity line of credit or dipping into your TFSA (tax free income) could help deal with these items in retirement. Many retirees quickly realize that their TFSA is an incredibly useful and flexible tool for both saving and spending.

Victory Lap Retirement?

Jonathan Chevreau and Mike Drak coined the phrase Victory Lap Retirement (read their book of the same name) with the idea that a full-stop retirement – in other words, going from 100% work mode to 100% leisure mode – was neither sustainable nor desirable.

Indeed, many of my retired clients continue to work in some capacity. Some consult back to the industry from which they retired, others work weekends at a garden centre, golf course, as a courtesy driver at a car dealership, or turn their hobby into a small business.

The activities serve two purposes: they keep the mind & body engaged and active, and they provide another income stream to enhance retirement lifestyle and/or reduce personal savings withdrawals.

Are you planning a full-stop retirement? A transition to semi-retirement? Do you like the idea of picking up a few shifts to stay busy and earn some spending money? 

Planning for Long-Term Care

Our long-term health is a major wildcard when thinking about retirement planning. You’ll need to determine based on your own health, the proximity of your children (if any), and the longevity and health of your parents and grandparents, what is the likelihood of needing long-term care as you age.

There’s research into retirement spending patterns that show annual spending declines as you get older. Instead of rising with inflation, spending might only increase by 1% or not increase at all past age 75 or so. That’s because spending on travel and hobbies (among other items) typically decreases as you get older.

But that could be offset by increased healthcare costs. So, one way to plan for this is to account for continuous inflation adjusted spending throughout your entire life (say, to age 95).

Homeowners could also plan to stay in their home throughout their entire life, knowing that their home equity could be used as a backstop in case they need to move to an assisted living facility or receive in-home care. In this case the home could be sold, or equity tapped with a reverse mortgage.

Final Thoughts

You’ll ideally start thinking about retirement planning long before asking the question: Do I have enough to retire?

Planning 5-10 years out could lead to a wider range of possibilities than planning 1-2 years out. You’ll have ample time to save more, which could lead to retiring earlier or spending more in retirement.

Think about what you’re retiring to, not just what you’re retiring from.

Are you going to spend time travelling to the same destination each year? Would it make sense to buy a property there, or rent? Do you plan on staying in your home until you die, or does your home equity need to factor into your retirement income at some point?

Retirement planning would be much easier if we knew how long we were going to live. Assumptions and rules of thumb can be useful, but what’s more important to think about is the kind of retirement lifestyle you envision and whether you have enough resources to get you there.

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  1. Randy on December 14, 2022 at 1:39 pm

    My wife and I are only a few years away from retirement and the biggest part of the puzzle we’ve found is how much do we actually spend / need.
    We’ve started using an app to keep track of all our expenses. Super simple to use and then we download to excel to analyze. This is not a plug for the app, but it’s simply called Spending Tracker if anyone wants to give it a try.
    We put absolutely everything in there, from a cup of coffee to vacations. It really helpful to see where your money actually goes.
    We figure if we do this for a few years before we retire, we’ll have a really good idea of our needs when the time comes for you to put together our plan Rob!!

    • Robb Engen on December 15, 2022 at 9:25 pm

      Hi Randy, thanks for sharing – I’ll check out the Spending Tracker app. Sounds like a good one!

    • Steve B. on April 22, 2023 at 8:31 am

      I haven’t heard if that app, thanks!

      The one thing that can be harder to track are ‘lumpy’ expenses like major car repairs or servicing, replacing a car, larger vacations, home repairs, renovations, upgrades, renovations, appliances, furniture, etc.

      I use 1% of the homes value as an average annual cost for the repairs/renovations category when building target retirement spending plans.


      • Randy on April 22, 2023 at 8:48 am

        The way we deal with “lumpy” expenses like vacations is to determine the total cost of the vacation and amortize that amount over 12 months in the year we took the vacation.
        Gives us a a way to look at how much per month we need to budget going forward.
        Reasonable way to do it I think?

        • Steve B on April 22, 2023 at 9:02 am

          Yes, good idea!

          If one of my clients takes the occasional bigger or family vacation, we add the extra cost to normal vacation spending to increase average annual spending. This just helps, along with the other things above, to come up with an approximate average annual target. From there, we figure out if someone is on track to meet that target.

  2. Mark on December 14, 2022 at 1:54 pm

    a couple comments:
    Average life expectency isn’t relevant since if you’re contemplating retirement you’ve already lived x number of years. So life expectancy beyond age x is what you need to look at. For those approaching 65 – life expectancy is ~87 years – so that’s a much better starting point than the 82 years you mention.

    – an even better strategy is not to spend all 90% of your salary increase. If you got along fine with 90% of your $60K salary, when you get that raise to $70K try to keep spending more in line with your $60K life. Sure reward yourself a little, but if you can bump that savings rate from 10% to 12% to 15% to 25% as you move up the ranks now you’re setting yourself up for a comfortable life.

    • Robb Engen on December 15, 2022 at 9:26 pm

      Hi Mark, read that part I wrote about life expectancy again – we’re saying the exact same thing 🙂

  3. Larry on December 14, 2022 at 3:41 pm

    I sent this article off to the younger generations in my family. I wish I’d
    read this in my younger days.

    • Robb Engen on December 15, 2022 at 9:28 pm

      Hi Larry, thank you – I appreciate the kind words and you sharing the article.

  4. Eric Bowlin on December 14, 2022 at 4:20 pm

    I agree that guessing at your spending in decades is really pointless. It’s nearly impossible to understand the cost of children for example.

  5. Jp on December 14, 2022 at 7:48 pm

    Good evening , I just started semi retirement. We still have a active corporation but starting to transfer to my long time employees . Anyways this is our first winter away we are in a resort in Arizona with our 9 year old 5th wheel . We have pools and a saloon and a golf course here plus lots of other stuff . Our living expenses will be more now than when we were at home due to added expenses here and still running our house . So a word to the young save as much as possible but never stop living. Memories are priceless .

  6. Donna on December 15, 2022 at 8:47 am

    Hi Robb,
    You mention ‘self-directed ETF investors can simply sell off units as needed to generate retirement income, or switch to an income producing ETF like Vanguard’s VRIF.’
    Aside from two years worth of cash (I like to be ahead), I have setup my portfolio to include nothing but income producing ETF’s. I plan to withdraw the dividends earned annually to supplement my CPP and OAS.
    My question is: why would anyone chose the latter (selling off units as needed to generate income)? Why deplete your capital when you could keep (most) of it and generate income off it? Am I missing something here?

    • Robb Engen on December 15, 2022 at 9:37 pm

      Hi Donna, if you only spend the dividends from your portfolio then you won’t be able to spend as much as someone who takes a “total return” approach with their portfolio (capital gains and dividends).

      That’s fine if you plan to live on less so you can leave a larger inheritance, but if you want to maximize your own spending in retirement you’ll need to dip into the capital.

      The total return concept is best described in this excellent article:

      The article is a few years old, so the concept is made simpler with all-in-one ETFs replacing the individual ETFs.

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