If you don’t plan your spending carefully, there is a real danger that you may outlive your money. Not so long ago, most people did not live past age 80 or 85. But in 2003, about 435,000 Canadians were age 85 or older. That’s twice as many as in 1981.
All those extra years create extra challenges. Prices will rise as the years go by, and you will need more health care as you age. These costs can use up your savings quickly.
What can you do? A well-thought-out plan can help you make your money last.
What factors should I consider when I plan my retirement spending?
1. Changing costs
Build some extra room into your budget in case your costs go up. For example, if you or your partner becomes ill, you will need extra money to pay the medical bills.
Rising prices may also mean you’ll need extra money. Someone spending $32,000 a year today may need almost twice as much 25 years later.
Allow for at least 3% inflation a year when you plan for your costs during retirement. If inflation goes down, you’ll have extra savings. If it rises faster, you’ll have to find ways to spend less.
2. Hidden costs
Factor income tax into your budget. Also, you may have taxes and fees to pay when you invest. These costs will reduce what you make from your savings and investments so you’ll have less money to spend.
If your investments are in a Registered Retirement Savings Plan (RRSP), you can put off paying tax as long as possible by delaying a move into a Registered Retirement Income Fund (RRIF) until age 71.
On the other hand, if you have a low income, you may not want to hold onto an RRSP or RRIF at all, because it may reduce your income from the government. In these cases, it’s best to get some professional advice to create a plan that makes sense for you.
3. Spending over many years
One of the top concerns for retirees is making their money last. The best plan is to have enough savings so you can live on what you make investing them.
If you are in good health, assume your money will have to last until you are at least 90 years of age. Be careful not to spend too much in your early retirement years. Look for ways to cut costs on things you don't really need.
Remember: It takes careful planning to make your money last
It’s better to spend less today if you need to ensure you’ll have enough savings for the years to come.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.