Introducing The Globe and Mail Retirement Forum, a place for Globe subscribers to ask questions about retirement and receive answers from a community that includes actual retirees.
We’re building this forum on the idea that retirees have valuable insights on how to retire well. Readers of all ages are invited to submit questions about investing, tax and day-to-day money management in retirement. I’ll weigh in with some thoughts and then open the floor to all. Retirees, we are especially interested in your take.
A few weeks ago, I did a shout-out in the twice weekly Carrick on Money e-mail newsletter for a first batch of retirement questions. You’ll see one of them below – a 51-year-old from Toronto named Don Maxwell asks about the percentage of his working income that he’ll need in retirement. Other topics people asked about:
-How hard it is to pivot from being an aggressive retirement saver to a spender once you’ve left the workforce
-How to minimize taxes when withdrawing money from RRSPs and RRIFs
-Ideas on places to retire outside Canada where the cost of living is cheaper
Submit your questions about retirement to me at firstname.lastname@example.org. We’ll post a new question every week or so and moderate the comments to ensure we have a helpful, respectful conversation. Tune in regularly to see what people – retirees and those still working – have to say.
Don Maxwell, 51 Lives in Toronto
I'm hoping to retire early, at 58. We typically hear about planning to live on 70 to 80 per cent of your pre-retirement income. Without a mortgage and without the need to save for RESPs or work-related costs this seems high. I'd like to hear from actual retirees about what amount makes sense. I understand it's relative, so I will say that in my retirement I want to be able to travel. One big trip per year - comfortable but we aren't talking luxurious accommodation.
The percentage of your working income that you need in retirement is referred to as the replacement ratio. Of all the measures of retirement readiness, the replacement ratio is one of the weakest. A 50 per cent ratio might work well for a person who intends to live modestly, while 100 per cent or more might be required for someone with big plans and expenses. Financial planners sometimes used 70 per cent as a default replacement ratio.
My suggestion: Personalize your replacement ratio using this online tool I developed for people looking ahead to retirement. It helps you compare current spending with anticipated retirement costs. There’s a full section of big expenses you won’t face in retirement, notably retirement saving and commuting costs. There’s also a section addressing a situation some retirees today find themselves in – supporting adult children or aged parents.
An alternative to the replacement ratio is the living standard replacement ratio, which was developed by actuary Bonnie-Jeanne MacDonald. The LSRR tells you if your standard of living will be the same, better or worse in retirement using your pre- and post-work spending patterns. I wrote about the LSRR a while back in a column that included some instructions on how to use it for your own situation.
Now, let’s see what members of the retirement forum community have to say in response to Don’s question. Please share your thoughts and advice in the comments below. Top comments will be added to this article.
Catch up on other discussions: Globe Retirement Forum: Is it worth buying health insurance for what provincial plans don’t cover?
Hi Don, I’m six years into early retirement and your question was one I asked of virtually every retiree I met in the years preceding. The general consensus in Victoria six years ago was $3500 CAD per couple allows for comfy, happy retirement. Would venture that number is higher now. But not enormously. In Mexico, can live an extremely comfortable life for that cost. I realized early that my months in Mexico or South East Asia were costing about half the price of Canada - for and extremely high quality of life. The key is, that we have generally always lived on a budget to some degree. This won’t change in retirement. I now spend about 11 months a year travelling and two to four weeks visiting family at home. P.S. - if you go to awesome places, they will come find you.
There is much that only Don can answer before retirement and gathering that info is vital. For instance: How much expense is required at home, whether traveling or not, such as shelter costs, insurance, vehicle expense, etc. Costs such as food and entertainment will only be predicable while at home. Travel expenses can be explored by visiting travel shops for all the various opportunities. However don't forget travel health insurance and passport requirements because maybe you can't travel. If you travel out of province for more than 180 days, you lose your provincial health benefits. Costing out various trips will, through experience, give more information and you can start small and build more expensively. The internet is a very valuable tool to gather necessary information before retirement, I have found and I have been retired for more than 25 years.
Makes you wonder:
We retired this year at 53. Here are a few tips: - Keep a detailed three year log of your expenses before you retire and categorize them as discretionary/non-discretionary and working/retired. You may be surprised what you spend/waste money on when you have a pay cheque coming in. This will help you understand what your 'retirement budget' should be. Add about 10% for surprises. - Try living off your 'retirement budget' level for two years before retiring. This helped us validate that our retirement lifestyle would be satisfactory and our budgets were realistic. - Our retirement budget is much higher than average but about 70% of our working after-tax income - and we own two properties and travel out of the country twice a year. How much can you safely spend each year? - Know your sources of retirement income and their tax treatment. How much of it is guaranteed? We have ~90% of our non-discretionary expenses covered by tax-efficient dividends. This is one of the major reasons our income levels don't need to be as high as when we were working. Lastly, If needed, work with an accredited financial planner to build a plan that you understand and keep it updated.
We started keeping a budget a few years ago to prepare in these last few years prior to full retirement. Actually, we keep two budgets: one the “real” budget and the other the “retirement” budget. The retirement budget covers everything the real budget does, except that it eliminates/substitutes all non-retirement income and all non-retirement expenses. By keeping both, we have a crystal clear picture of whether or not we can live on our post-retirement income. Can the retirement income handle the roof repair? The appliances breakdown? That extra little vacation? We know exactly what aspects of our current lifestyle are affordable and which are not, month by month, category by category. I highly recommend you begin by becoming intimate with your current spending in order to project accurately what your true needs will be into your future.
I agree with the comments that emphasize an individual approach to figuring out your post-retirement expenses. I have been retired for six years and we did a lot of planning in advance. We knew that we would be going from two cars down to one, and would have much lower gas costs without the daily commute to work. We have been a one income family for many years so we knew our taxes would be much lower after retirement due to pension splitting. We were fortunate to have the opportunity to save more in the years prior to retirement due to promotions. Most people hit their highest earning years at the end of their career and if you can keep from increasing your spending at the same rate, it's much easier to adjust to a lower income in retirement. One of the more difficult challenges is to anticipate changes in lifestyle. We like to travel and assumed we would travel much more after retirement. We travel a bit more but not as much as we expected. I think it is true for many retirees that your lifestyle doesn't change as dramatically as you think it will - but it's still better to plan for the added cost of any new activities you think you might want to try.
Everyone is different. I am convinced the 70% rule is made up by financial advisors wanting our investment dollars. Track your actual expenses until you have a good idea of what a year plus occasional big ticket items like a new car, roof, trips, wedding would look like. I did this for a few years. Add a safety cushion. Then remove and add expenses to get a yearly budget that reflects what you expect when you retire. Then live on that budget for a minimum of six months, but ideally a year. We did that. The first two or three months were tough but we adjusted. Managing cash flow was key. This allowed my husband to retire at 56 and me at 55 two years later. It has been almost ten years for him. We currently use what would be about 46% (I am a stats nerd) of our final year’s salary (plus inflation) for a basic but enjoyable lifestyle. We bring in more than that and we are deferring our OAS while we melt down our RRSPs. We intend to max our grandchildren’s RESPs and have maxed our TFSAs. We take several large trips a year with our RRSPs and ‘excess’ monthly income with the idea we must do it while we are able.
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