Are you saving enough for retirement? That's an important question, and you can't afford to guess how much money you'll need to retire.
In a recent CIBC pollOpens a new window in your browser , Canadians were asked to estimate how much they'd need to retire. On average, they guessed that $756,000 would be their magic retirement number, while 26% said they didn't know. Ninety per cent don't have a plan in place to make their desired retirement lifestyle a reality.
Looking for a clear idea of your long-term savings needs? These tips can help you hone in on your personal retirement savings number and bring clarity to what can feel like a murky figure.
Define your retirement dream first
Everyone's retirement looks different. Travelling, starting a business or indulging in new hobbies could swell your retirement spending.
Practicing a healthy lifestyle, plus advancements in medicine, can also have an impact — potentially leading to a longer life expectancy. The average life expectancy for Canadian men is currently 81; for women, it's 85, according to the World Health Organization (WHO)Opens a new window in your browser. Living longer could mean spending more time in retirement than you originally planned and your savings must be able to keep pace. A major illness, on the other hand, could cause you to accelerate your spending in retirement if you need to tap a larger share of your savings for medical expenses.
Creating a potential retirement budget could help in setting an appropriate savings guideline once you've defined your retirement vision. This budget should account for day-to-day expenses like food, costs that may increase in retirement, such as health care, and new expenses, such as travel.
It might be easiest to begin with a monthly budget, then use that to create an annual budget. Your financial advisor can help.
Run the numbers on your vision
Once you create your estimated retirement expenses, the next step is determining how much income you'll need in retirement to meet your budget.
Using the $756,000 figure from the CIBC poll mentioned earlier as an example, you could withdraw $5,000 per month for 21 years, assuming a 7% annual return. If your projected monthly spending in retirement is $10,000, you'd need to set a higher savings goal or adjust your expenses.
As you begin to contemplate your ideal savings number, a retirement calculator can help. These calculators use your current age, planned retirement age, estimated years in retirement and income to generate a savings number.
You should also account for any major lifestyle changes, such as spending more time travelling or starting a business, that could increase the amount of income you'll need. Seeing the numbers in black and white with a retirement calculator can give you the perspective you need to better shape your savings plan.
Don't forget inflation
Inflation can affect your purchasing power in retirement. When prices rise, your dollars don't stretch as far. On average, Canada's consumer price indexOpens a new window in your browser rises by 2% each year. If you have 30 years until retirement, your savings number needs to account for future price increases.
Of course, that number doesn't take into account any supplemental savings you may have from a Canada Pension Plan or Old Age Security. As you work towards your retirement savings number, remember to factor those benefits into the equation.
Make it easy
If you're ready to find your retirement savings target, stay focused and keep it simple. Consider your desired retirement lifestyle, how your current savings rate aligns with future income needs and how things like changing health and inflation may impact your financial outlook to arrive at your ideal savings goal. One last tip: talk to a financial advisor about your retirement savings plan and the necessary steps to help you make your retirement dream a reality.