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retirement and rrsps

A woman holding a smaller piggy bank looks enviously at the larger piggy bank of the man beside her.

If you haven't yet become serious about saving for retirement, it might have little to do with your procrastinating ways. Maybe you simply don't know how much money you really need after your career.

That's what Tony Maiorino, vice-president and head of RBC Wealth Management Services in Toronto, says he's noticed over the years. People who avoid crunching the numbers and coming up with a monetary goal often put off saving for retirement. Without a tangible target or plan, planning for tomorrow becomes an exercise without much purpose today.

"The difficulty in determining how much is required at retirement is probably one of the biggest contributors to starting late," explains Mr. Maiorino.

So how exactly do financial planners and advisers calculate a magic number their clients can retire on and what information do they need to make a calculated stab? We asked a couple of advisers to pull back the curtain and reveal the criteria they use.

Timing is everything.

The first thing Mr. Maiorino asks clients is, "When do you want to retire?" By formulating a timeline first, he'll know whether their retirement expectations are realistic.

It also gives a sense of which life-stage they're likely to be entering when they leave the work force. Will the kids be out of the house? Will the mortgage be paid off? Will caring for elderly parents likely be part of the picture? The timing may also has an impact on the types of investments chosen.

Some clients picture themselves scuba diving off the coast of Bonaire in their golden years. Others expect to do a little consulting work on the side and stick close to home with family. Not sure yourself? You're hardly alone, says Aaron Keogh, a financial adviser and president of Greendoor Financial Inc. in Windsor, Ont.

"It's hard to say to someone, 'What do you want to do in 30 years?'" he acknowledges.

Rather than go there first, Mr. Keogh says he breaks the question down into pieces by asking about short-term goals first. What would make the client feel they were making financial progress three years from now? Paying the mortgage down faster? Having $12,000 in a registered retirement savings plan (RRSP) or tax free savings account (TFSA)? Knocking off credit-card debt? All these goals help get clients to their long-term retirement goal without placing it front and centre. "It allows people to look at something more tangible and real," he maintains.

Then comes the nitty-gritty.

Add up savings so far.

Now it's time to break out the calculator. Planners look at savings and retirement accounts and see what clients already have set aside.

Figure out how much guaranteed money you'll have.

If you're one of the lucky ones working for the government or a large corporation and expect to receive a pension, your planner will ask to look at your most recent statement to determine how much money you will likely receive each month. (If you can't find your statement, ask your human resources department for the information.) He or she will also be calculating your Canadian Pension Plan (CPP) and Old Age Security (OAS) amount, using the most recent data. Some people include income properties in this category, although the money is not always a sure thing.

Look at spending today.

While Mr. Keogh says he doesn't need to know exactly how often you go to Tim Hortons or what you spend at Shoppers Drug Mart on your lunch hour, he is interested in your disposable income after expenses. How much discretionary money are you blowing through each month? He takes that amount and runs 30-year investment projections showing how much the client would be able to draw each month from it in retirement.

"Sometimes looking at that number helps people think, 'That doesn't look good. Maybe I need to rethink my current lifestyle,'" he says.

Then there's consumer debt to consider. The amount surely has an impact on how and when clients are able to retire.

"There's no question that both sides of the balance sheet have to be analyzed in order to come up with the right retirement number," Mr. Maiorino says. "I can sell a cottage or a house and turn that into an asset to supplement my retirement. I can't sell my credit card debt."

What you'll really pay for.

Most experts say that people need approximately 75 to 85 per cent of their current pay to maintain their lifestyle during retirement. That's because a lot of what you're paying for now will hopefully disappear later.

For instance, that mortgage. If someone has been paying $2,000 a month for the house and that bill suddenly disappears, that's $2,000 less to come up with later. The same is true for registered education savings plan (RESP) contributions, if the kids are in university or college come retirement.

And here's something else you won't be spending in retirement: saving for retirement.

Don't forget all the smaller items that go away once someone leaves the work force. A suitable wardrobe, for one. Mr. Maiorino and his wife pay a combined $450 a month in commuter transit costs. That would go away, too.

On the flip side, you might lose your prescription drug plan and dental insurance and have to pay for them out of pocket. And don't forget all the expenses that don't go away – hello, personal income tax – and some even increase over time: house taxes, condo fees, utilities, new roofs and furnaces, and insurance premiums.

If you expect to spend money on travel or other expensive pursuits, that needs to be tallied, too.

Subtract and build a plan.

Planners run the numbers and figure out the difference between income and expenses during retirement, allowing for inflation and retirement. That number is your savings goal.

Ultimately, there's no one perfect number for everyone, which is why it's important to create a personalized plan.

"Having a plan made for you helps you avoid the whole, 'Oh, you should have a million dollars at retirement' myth," Mr. Maiorino says. "There is a whole host of variables that have to be analyzed when saving for retirement."

The Globe's financial calculators can help with financial calculations.

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