Glory Gray 0:03
A wise client once told me, "I've finally come to the realization that I can have anything I want in life. I just can't have everything I want."
Welcome to Women's Wealth Canada. I'm Glory Gray. Today we're continuing with our downsizing series. If you remember from our last episode we talked about your plan for how you want to live in retirement and what that will look like. If you didn't get a chance to listen to episode one, feel free to go and take a boo at that first. Today we'll be answering the question, "Do you have the means to do what you want to do at how do you figure that out?"
Well in order to know if you have the money to do what you want to do in retirement, You have to know what you're going to spend doing what you want to do.
When someone comes to me for advice for the first time, it's usually to ask me, When can they retire, Can they retire now? To which I reply, I don't know, can you? Now that may seem like a flippant remark, but my point is this. So often we hear in the media. Oh, everyone needs a million dollars to retire or 2 million. No they don't. Everyone's journey after they've spent years raising their children and working various careers, their journey is unique to them. And the only way to know if they have enough money to fund that journey to pay for their new life or retirement is to find out how much are they going to spend right?
Just like if you're calculating how much money you need to save for your children's college or trade school education, you look at the cost of tuition for the school they went to go to. You look at the room and board, you start with those costs, and then you figure out how much you need to save and go from there. So if someone tells me they have a million dollars saved and asks me, Can they retire, I don't have enough information yet to give them an answer. So let's figure out the answer together.
One rule of thumb that has been used in the past to estimate the amount of money you'll spend in retirement, is to take 60 to 80% of the monthly income you have before retirement, and use that as a monthly income figure you'll need after retirement. However, there's been new research that shows you may not even need that much. Do you remember Bill Morneau, the former finance minister? Before he became Finance Minister he co wrote a book with actuary Fred Vettes called "The Real Retirement." Their research debunks the myth that most Canadians need to create a retirement income that is 60 to 80% of the monthly income they earned when they were working. They found that most Canadians can maintain the same lifestyle with only half of the monthly income they earned when they were working.
Now why is that, let's consider a few things. When you're working, you spend a lot of your earnings on expenses you won't need in retirement. Long commutes child rearing Hey hockey and soccer camp are expensive. You don't need work clothing, and other business expenses. Many of us experienced this firsthand during the pandemic. When we started working from home and not going anywhere. Many Canadians started to save a lot more money because they weren't going out for lunch or commuting to a job in retirement. You may have less of a mortgage payment because that mortgage may have been paid off or at least paid down by the time you retire, and generally you're in a lower income tax bracket because you aren't earning money anymore so you have less taxes to pay. Plus, when you're working, you're putting away money for savings. And what are you saving for? For your retirement! And that also goes away once you're retired.
So for most people, many expenses will go away, or be greatly reduced after retirement. So you may very well be able to live comfortably in retirement on half the earnings you had when you were working, but let me make this clear, estimates and percentages aren't a good method to use when you're thinking of downsizing and retiring in the next few years. That might work if you're not retiring for 20 years, but when you're retiring next year, you really need to get more specific data.
Now let me say as an aside here, when describing your expenses, I prefer to use the term mindful spending plan, rather than using the word budget. And that term isn't just spin it emphasizes the fact that you have the power over your future, it speaks to the fact that you have choices and what is important in your life, and therefore, what you spend your money on. A wise client once told me, I've finally come to the realization that I can have anything I want in life. I just can't have everything I want.
Let's use the example of my client, we'll call her Maria. Maria came to me and was planning on retiring the following year.
Crowd 5:19
Yeah!
Glory Gray 5:21
I know it's very exciting. So since she's retiring the following year she doesn't have 20 years until she retires, So she needed to get some specific data. She wanted to know if she had the means to do it, to retire. What's it going to cost for her to live in retirement?
The first thing I had her do before we could figure out when she'd be able to cut the cord and retire, was to figure out what her current annual household expenses were. And as we'll see later, it's important to break down your expenses into categories like food, utilities, transportation, and total the categories rather than having all your expenses lumped together. You don't want to do that break them down because you'll need that later.
So I sent Maria home with some homework, she was to come back with a list of one month's worth of household expenses. Now there's a lot of tools that can help Maria do this, she can use a tool such as the Ontario security Commission's get smarter about money, budgeting tool. She can use the online version or just print it out and fill it in by hand. I'll put a copy of the link to this in the notes. She can use an app such as mint.com, that's a tool made by the same company that offers TurboTax. I like this tool a lot, it automatically tracks your expenditures and categorizes them for you. Most of my clients simply print out the get smarter about money worksheet and fill it in by hand, by going back into their banking statements and credit card statements and putting all their expenses into categories, or they create their own that's fine.
So once Maria had this information, a month's worth of expenses, She went through and crossed off all the expenses that she wouldn't be spending money on during her first year of retirement. She didn't have to think about the next 30 years just, what will she need during the first year that she retires? And this is why we need those individual expense categories, so she can figure out what expenses she would need during her first year of retirement. So, in her case right away. She knew she was spending less money eating out less money on petrol, and she went through the list and started cutting these expenses out that she wouldn't need her first year.
Next, now that Maria knew what she wouldn't be spending money on her first year of retirement, what would she be spending money on that she could add to her current annual expenses? She's not going to be working but maybe the money she sets aside for hobbies and sports may go up. If she lives in British Columbia and is over 65 She may be able to reduce her property taxes, and she plans to have her mortgage paid off before she retires so those go away. But she may have higher travel expenses. She may not be home as often she may also need a house sitter and that is an expense. So to summarize, Maria wrote down her current annual expenses for the current year. She scratched out the expenses, she wouldn't need during her first year after she retires and added back the expenses, she'd be increasing during the first year she retires, Maria now had a spending plan for her first year of retirement.
But what about all the future years in retirement after her first year? Research has found that expenses in our late 60s are usually much higher than in our 80s. In our 60s and 70s We're traveling more visiting grandchildren, checking off our bucket list as fast as we can. By the time we reach our 80s Most people, not everyone, but most have kind of been there, done that. And they're content to stay at home more often. However, research shows that out of pocket health care costs go up in our 80s and particularly in our 90s
So to figure out future income needs from Maria, she and I discussed her health her travel plans, Her planned giving and other goals, and then we created a spending plan for each year of her retirement, accounting for those goals. We also took into account of variables such as inflation and longevity. We don't need to be perfect. This is not a one and done process, she and I and my team will work together over the years with her family, as things change. So Maria now knew how much income she'll need to last through her retirement. But did she have enough savings to pay herself through retirement? I then returned to my calculator again, examining how much her investments were expected to earn.
Now my analysis takes hours to complete. However, if you want to estimate how much savings you'll need to fund your retirement, you can try applying the 4% rule. Now what is the 4% rule? Well, you may know people who are excited to tell you about the 22% return they got on a, quote, hot stock tip. What they don't share with you is the 54% losses they experienced on another hot stock tip. It boils down to this: a continual return of 22% over 30, or 40 years you'll be retired is not sustainable, and is unrealistic for most people, at least most people who treasure sleeping at night. A better expected return on your investments number to use in retirement is 4%. This is the realistic expected return, that a portfolio consisting of half bonds and half stocks would produce over a 30 year period. If you're 65 Now in 30 years you'll be 95 you need to provide an income for that 30 years. The 4% rule says that if you can live off the 4% you earn on your investments, you will never need to touch the money you saved, and it will last your entire retirement and beyond.
So if you were Maria, and you wanted to use the 4% rule, you would know that your expenses in retirement, would be $4,000 per month, you would have some retirement income coming in to help pay for that right. She had government benefits, plus her teacher's pension, and those would cover $2500 of the $4000 per month that she needs, so she needs to make up the $1500 per month difference with savings, and that's an annual amount of $18,000. So we take that information and calculate how much money she needs to have saved before she can retire. So we take 18,000, we divide it by 4%, so divided by 0.04 And we come up with $450,000.
So if Maria just wanted to do a quick back of the envelope calculation she could try using the 4% rule, that would show that she needs to have $450,000 saved in order to be able to support the lifestyle that she wants to in retirement. She could have that in her RRSP her investment account GICs, whatever, she just needs to have $450,000 in savings by the time she retires, and that doesn't take into account inflation personal preferences, estate needs, taxes. It also assumes that she wants to pass on $450,000 to her estate, if that's something important to you, you'd have a different calculation, that's another place where a financial advisor can help, but it's a start.
So to do this for yourself, take the annual amount of expenses you need that isn't covered by as some other source of income divide it by 4%, and that will equal the amount you need to save, in order to retire. If you go through this exercise yourself and you find you don't have enough money to create an income for yourself or retirement, don't fret. There's a lot you can do to reduce your expenses in retirement, and a lot you can do to save money if you put your mind to it, the right financial advisor can certainly help you be accountable to yourself.
Here's the bottom line, whether or not you have plenty of savings to provide an income for yourself in retirement, or you still have more saving to do, knowing where you stand will empower you to prepare for this exciting time of life.
How did you do when you've calculated your 4%? Are you all set to retire, or do you need more time to achieve your goal? Send me an email at Hello@womenswealth.ca and let me know what you think.
Next time we'll wrap up our downsizing series by getting down to brass tacks, making the move and what happens for you in this new chapter. I'm excited for you. You're doing great!
For more tips, go to our website, womenswealth.ca That's womenswealth.ca, links to that site and other resources in this episode are in the show notes. If you have a question you'd like answered in a future episode, or you'd like to get a hold of me, Glory, to schedule a free financial consultation, send us an email at Hello@womenswealth.ca.
Thank you for the gift of your time today if this podcast helped you, please subscribe on Apple podcasts, Spotify, or wherever you get your podcasts, and please let others know about us, so we can help them too. Until next time, this is Glory Gray, your personal trainer for financial fitness, telling you to take charge of your finances, plan for the future. But most of all enjoy today. And bye for now.
Announcer 14:31
This podcast is for informational purposes only and should not be construed as investment, tax or legal advice. It is not an offer to sell or buy, an endorsement recommendation or sponsorship of any entity or security sited. Mutual funds offered through Portfolio strategies Corporation, other products and services provided through Glory Gray Wealth Solutions.
Transcribed by https://otter.ai
