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.

Inflation. It’s on everyone’s mind as the cost of goods and services have been on the rise since early 2021. 

The Consumer Price Index (CPI) measures changes in the cost of a fixed basket of goods over time, including food, shelter, transportation, furniture, clothing, and recreation.

While inflation may have peaked in June of this year (8.1% year-over-year increase in CPI), prices are still stubbornly high and may take another year or so to come back down to the target range of 1% to 3%.

One problem with the headline inflation number is it may not accurately represent your personal rate of inflation. After all, no one is an average. We all experience a different rate of inflation based on our spending preferences and age and stage of life.

Statistics Canada has a personal inflation calculator to show how your experience with inflation differs from the average Canadian household. It’s a useful exercise to go through to get an idea of how inflation has impacted you over the past year.

If you’re a personal finance nerd like me you probably have all the data you need – your tracked expenses by category over the past year.

My Personal Inflation Rate

I was curious to see what our own personal inflation rate has been for the past year or so. I used the Stats Canada calculator and the results were pretty much what I expected.

When inflation started climbing in early 2021 our personal inflation rate trailed the average Canadian household. We don’t spend much on gasoline. We didn’t buy a car. We didn’t have any big renovation costs or spend on electronics. Our mortgage interest was also below 2%.

Fast forward to the summer of 2022 and our personal inflation rate caught up and surpassed the national average. That’s mostly because travel got expensive and interest rates spiked. 

We expect our personal inflation rate will come down over time but will still remain higher than the national average due to carrying our builder mortgage and line of credit into the first half of 2023. 

Indeed, it turns out inflation may not yet have peaked for us. 

Readers: have you tried the personal inflation calculator? Is your personal inflation rate higher or lower than the national average?

This Week’s Recap:

On Wednesday I wrote about my financial goals for 2023. Check out the article if you missed it and read the comments if you’re looking for some inspiration / motivation from fellow readers.

I plan to take the last two weeks of December off (more or less) to get ready for Christmas and enjoy the holiday season. 

We were so fortunate to be able to take about nine weeks off for travel, and another two weeks off to end the year. That’s the equivalent of taking 50-55 vacation days (depending on where stat holidays fall), which handily beats the 22 vacation days I used to get at my day job!

Best of all, we still managed to exceed our business revenue goals thanks to continued interest in my fee-only financial planning service and new freelance writing opportunities.

Thanks to all of our clients for the interest and engagement this year. Even though 2022 was a challenging year in many respects, a solid financial plan can help navigate the choppy waters and keep you focused on the big picture so you can achieve your goals.

Weekend Reading:

Rob Carrick explains why RBC buying HSBC is a loss for the banking public. HSBC routinely offered mortgage rates 20 basis points below the big banks’ rates.

Jason Heath says it’s time for borrowers to accept the new normal of higher rates and plan accordingly.

If you have children attending post-secondary December is the time to check your RESP withdrawal strategy to help cut any taxes.

Should you collect CPP and OAS while working in your 60s? Here’s what you need to know about applying for your government pensions.

Dimensional founder and Executive Chairman David Booth explains why you time the market at your peril.

PWL Capital’s Justin Bender looks at how currency conversion fees might impact your decision on which ETF to invest in:

Andrew Hallam shows how over a period of 35 years, index fund investors earn 100 percent more money than those who buy actively managed funds.

Morningstar’s Christine Benz explains the bucket approach to building a retirement portfolio:

1) Income from cash holdings in Bucket 1.

2) Income from bonds and dividend-paying stocks from Buckets 2 and possibly even 3. (Income-focused investors might decide that their bucket maintenance starts and stops with these distributions.)

3) Rebalancing proceeds from Buckets 2 and especially 3.

4) Principal withdrawals from Bucket 2, provided the above methods have been exhausted. Such a scenario would tend to be most likely in a market environment like 2022, when bonds and equities slumped at the same time, thereby making it an inopportune time to unload equities.

The brilliant Morgan Housel shares five short stories about expectations.

Finally, the Monevator blog argues that if 2022 taught you never to own bonds, you learned the wrong lesson.

Have a great weekend, everyone!

It’s safe to say that 2022 did not go according to plan. On a macro level we had stubbornly high inflation, rapidly rising interest rates, and falling stock and bond prices. Personally, we managed to execute our revenge travel plans with a week in Maui, three-and-a-half weeks in Italy, three-and-a-half weeks in the U.K, and eight nights in Paris. And, in the midst of all of this, we decided to build a new house.

I like to set financial goals before the start of each year so we can map out our spending and savings strategy and make sure we’re aligned with our longer-term vision. But plans can change and so it’s important to be flexible and course correct as needed.

At this time last year I fully intended tackle five goals:

1. Finish catching up on my wife’s unused TFSA room ($37,500)
2. Max out my annual TFSA room ($6,000)
3. Invest excess profits in the corporate investing account (~$48,000)
4. Max out RESP contributions ($5,000) 
5. Add an extra $6,500 into our travel budget

The year started off well enough. I contributed the $6,000 annual maximum to my TFSA and we added another $10,000 to my wife’s TFSA. We contributed $8,000 to our corporate investing account.

Then we went to visit a show home in a new community nearby our house. One thing led to another and we ended up signing a purchase agreement to buy a lot and build a new house. 

Our course correction from there meant pausing contributions to my wife’s TFSA and in fact we ended up draining our TFSAs to use for the initial deposit and subsequent draw. 

We also adjusted our expected contributions to the corporate investing account, from $48,000 down to $36,000, to build up a bigger cash reserve just in case.

Outside of that major change in plans, we managed to travel through most of April and July and still exceeded our business revenue expectations for the year. We also maxed out the kids’ RESP contributions for the year.

2023 Financial Goals

We don’t have a possession date for our new house yet but we’re targeting March 1st. We’ll also need to put our existing house up for sale (definitely not renting it out!) soon and try to thread the needle of selling it shortly after moving into our new house.

Whenever you’re going through a major life change, whether it’s buying a new house, going on parental leave, having a child, or even retiring, it’s okay to give yourself a grace period to adjust to your new situation. That might mean pausing automatic savings contributions for 3-6 months to make sure you’re still on solid financial footing.

On the other hand, as a planner I like dealing with certainty when it comes to my own finances. Unfortunately, we don’t have much certainty heading into 2023.

We don’t have a possession date. We don’t know when (or if) our existing house will sell, or for how much. We don’t know how much we’ll end up putting down on the new mortgage. We don’t know what the new interest rate will be on the new mortgage. We don’t know (exactly) how much we’ll end up spending on extras such as window coverings, landscaping, a new couch and TV, moving costs, and any “upgrades” over and above our housing allowances.

We also don’t know if we’ll travel next year. With the move and the extra expenses, it might be nice (and economical) to stay home for a year and enjoy our new surroundings.

Finally, we don’t know how much we’ll be able to save and invest next year.

With all of that in mind, here are our very simplified 2023 financial goals:

1. Move into our new house 
2. Sell our existing house
3. Set aside ~$50,000 from the house sale proceeds for window coverings, landscaping, and other “extras”
4. New house is completely furnished, windows covered, yard landscaped in 2023. No “someday, maybes”
5. Remaining proceeds from house sale go towards the new mortgage
6. Max out RESP contributions ($5,000)
7. Contribute $6,500 each to our TFSAs (late 2023)
8. Invest excess profits in the corporate investing account (~$36,000)
9. Maintain work-life balance – no increase in business revenue expectations
10. Use accumulated travel points towards a one-week all-inclusive holiday somewhere sunny

Everything flows from the first two goals. We need to be in our new house and to sell our existing house before we can achieve any other personal goals. Everything else will remain on hold until we have certainty around the timing and financial implications of this move.

Final Thoughts

The past year has been unusual in a lot of ways. Next year will be much of the same until we settle into our new reality. For us, it’s the start of a new chapter in our lives.

We’ll get our feet under us again and make a plan for the next 10 years of our life. That will include paying down the new mortgage, filling up our TFSAs again, and building up our corporate investments. It will definitely include more travel.

A transition period like this is a great time to re-evaluate your annual financial goals and make sure they align with your long term vision. Know that it’s okay to pause your regular savings while you adjust to your new situation, or if you need to fund a one-time expense. 

Assess the impact. What will the change mean for your long-term goals? You might need to work a year or two longer, or reduce your spending assumptions in retirement. Maybe it won’t impact your goals at all.

Readers: what are your financial goals for 2023? Any big changes from this year to next year?