Q What percentage of my income will I need after I retire?
A The rule of thumb says you’ll need 70% to maintain your standard of living. Relying on this estimate, however, can be dangerous because your financial situation is as individual as your fingerprints. What happens if you make sacrifices your entire working life to build up an RRSP that will provide you with 70% of your preretirement income only to find that 50% would have done nicely? Here are a few tips to help you calculate your specific income needs in retirement:
Make a plan. Most Canadians don’t give their personal finances much thought and assume it’ll “work itself out in the end.” This is the worst thing you can do.
Treat your personal finances like a business client. Create a complete set of personal financial statements on your family. Your income statement will provide details about your spending. Armed with these details you can make an objective calculation of what your spending is likely to be after you retire.
Don’t assume your costs will remain static. Many people in their peak earning years contend with high taxes, CPP and EI deductions, mortgage payments, kids’ education, clothing and food costs, RRSP contributions, etc. When you retire many of these expenses will no longer apply, so you may need as little as 40% of your current income.
David Trahair, CA, is author of Smoke and Mirrors: Financial Myths That Will Ruin Your Retirement Dreams and provides personal financial checkups for clients. He can be reached through www.smokeandmirrors.ca.
