Well, between some pre-planned travel and conferences, and an unplanned bout with the flu, November was a bit of a write-off for the Before You Invest blog. But I am back, and will be implementing some form of “pandemic planning” for the site in the future.
Now, where were we? Retirement planning, wasn’t it?
We had talked about retirement needs, and possible current sources of retirement income. Now we need to look at taking those numbers and creating a plan.
I could spend many words and a week’s worth of posts explaining the math necessary to calculate monthly saving requirements, or I could save us all the time and headache and direct you to a couple of great financial calculators.
The first and simplest picks us up where we left off last time. You’ve determined what (if any) pension income you can expect, and know how much money you personally need to provide to achieve your desired retirement income.
Using the Fiscal Agents’ Retirement Savings and Income Calculator, you can enter this goal, any current savings and planned annual contributions, expected return, adjust for inflation (estimate 2-3%) and be provided with a suggested savings rate.
For example, imagine a 35 year old, with 20,000 in current savings, planning to retire at age 60, and after CPP and employer pension, wanting to provide an additional 20,000 annually. Being conservative, she estimates an inflation rate of 2%, expected returns of 6% before retirement and 3% after retirement. She would like to plan for the money to last her to the age of 90 years. Currently she puts $300/month into an RRSP.
Using these numbers, the calculator tells her she needs to contribute an additional $620 per month. That’s an increase of more than 200%!
What options are available to our fictional investor? Perhaps she could invest more aggressively? If she achieves a rate of 8% pre-retirement, and 4% after retirement, she only needs to save an additional $250 each month – but of course more aggressive investments come with more risk, and may not achieve their goal, leaving her short.
Another option is to look at retirement date. Keeping the original assumptions, if she chooses to retire at age 65, not 60, she can meet her goal by contributing an additional $260 each month.
Time is of course the most important factor in retirement planning. A 20 year old could reach these goals for significantly smaller monthly contributions. For my young readers, take a good look, and get yourself started now. For the rest of you, I quote an old Chinese proverb: “The best time to plant a tree is twenty years ago. The second best time is now.”
There are other more complex calculators available that allow you to play with even more factors. Two of the best are the Retirement Planner, also from Fiscal Agents, and Human Resources and Social Development Canada’s Canadian Retirement Income Calculator. Try them out to see which works best for you.
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