How much is enough in retirement?

Well, it depends.

The rule of thumb that you only need 70% of your pre-retirement income is too simplistic.   For some people, it is sufficient.   But for many, it is not.

A good start in determining how much you’ll need in retirement is to break down your budget into two categories of spending –

  • necessities (basic food, shelter, clothing, medication, etc.), and
  • discretionary (travel, dining out, entertainment, money for a new car every years, etc.)

If your basic needs add up to 50% of your after-tax income, you will have up to another 50% for discretionary spending.  So if you choose to spend only 25% on discretionary items, then you will need a total of 75% of your current income in retirement.

And remember to take into account in your calculation that certain expenses will decline or even disappear in retirement.   For example, you will no longer have to make CPP or EI contributions, income tax will likely decrease, and the need to buy work clothes will be a thing of the past.

On the other hand, certain costs will likely increase in retirement.    Healthcare and hobby related expenses will likely go up.   So include these items in your retirement budget.

The last bit of planning is to make sure you will have enough income to take care of your retirement needs when you retire, before you retire.

It’s RRSP Time Again!

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Needless to say, it’s that time of the year again when some of us are scrounging for money and time to invest to our Registered Retirement Savings Plan (RRSP).

If you’re a procrastinator and haven’t got around to contributing yet, here are a few things to keep in mind.

• Deadline for this year is 11:59pm Monday, February 29, 2016.

• If you have high income in 2015 and projected low income for 2016, you may want to use RRSP contributions (2015)/withdrawals (2016) to equalize your income of both years to save on the overall income taxes for the combined two years.

• Contribute to a spousal RRSP if you’re the high income earner in the household. This will enable you the tax deductions and equalize both your retirement income down the road on retirement.

• If you have no or low income in 2015, you probably want to skip the contribution altogether for this year. This is especially applicable if you anticipate higher income years in the near future which can benefit more from your contributions then.

• Do not exceed your RRSP contribution limit. Check your Notice of Assessment for the maximum amount you’re allowed. There’s a maximum over-contribution limit of $2,000 and going over will end up attracting a steep penalty.

Other considerations

• Don’t rush into the wrong investments when you make your RRSP contributions. Temporarily park your contributions into a cash account within your plan. Take your time and make your investment decision later when you’ve done your due diligence.

• Consider appointing a beneficiary.

• Keep in mind any RRSP withdrawals are taxable in the year of withdrawal.

• Keep in mind any spousal RRSP withdrawals may be taxable by the higher income earner if the rules are not followed. Consult with your advisor before making this move.

• You can still make contributions to a spousal RRSP after you turned 71 if you have the room, providing your spouse is not yet 71.

• And remember your RRSP is, first and foremost, savings for your retirement. Do not use it as a short term savings vehicle.

Back From the Future – Savings Basics

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I came across a recent ad with ex-dragon Arlene Dickinson espousing her goal-oriented strategy for saving money and restoring financial well-being.  Immediately, the book The Millionaire Next Door came to my mind.  This New York Times bestseller was published a number of years ago sharing with readers the surprisingly simple, yet effective secrets to amassing a million dollars or more.  Those strategies then still apply today, as they did for many generations before us.

Both messages are literally the same.  Slow and steady win the day when it comes to responsible saving and budgeting.

For example, you can save as little as $2.75 a day; and that can add up to $1,000 a year.  Think 20 years into the future, that’s $20,000 from just saving the price of a cup of coffee at Starbucks today!  This doesn’t even take into account the compounding effect of investing, which can potentially double (*) this total!

So by giving up a coffee at your favourite Tim Horton’s, walking or taking public transit instead of driving to your local store, and packing your lunch instead of fast food out, they can all add up.

There are many ideas to save.  Just google budgeting, saving tips, etc. and you will be bombarded with thousands of useful websites and ideas.   My book ‘The Personal Budgeting Kit‘ also has many smart saving ideas to help you on your way.

Here are some other strategies to keep in mind. They are simple, basic and logical.

Systematically:
– live below your means
– save your money
– pay down your debt

Always:
– have a plan/goal
– seek advice
– read up on saving ideas

As quoted from the Millionaire Next Door – “Whatever your income, always live below your means.”
And as quoted from Arlene Dickinson in the ad – “Keep at it when you can and it will add up.”

 

(*)  assuming a 6% or higher compounding annual return.

Save your money $$$

Here are some concrete saving ideas to help you keep more of your money.   Read my recent posts on how to save over $42,500 in just 7 years, even with only a 4% rate of return!

1)   Do not impulse buy, only shop for what’s on your prepared list;
(Studies have shown that as much as $3,700 a year is wasted on unnecessary purchases.)

 

2)   Lunch in (not out) more often;
(A average savings of at least $5 per meal when not lunching out.  Do this twice a week and you will save $520 a year.)

lunch in, save money

lunch in, save money

 

3)   Stop food waste, be creative with leftovers;
(Studies have shown that as much as 35% of our food ends up being wasted, or $2,200 year.)

 

4)   Pay your credit card bills on time;
(It’s obvious, many dollars can be saved when you stop those 18% to 20% interest charges levied by your credit card companies.)

no more credit card late payments!

no more credit card late payments!

 

5)   Look for cheaper phone plans;
(Even a savings of $20 a month in your phone plan will save you $240 a year.)

 

Add up all your savings and you are well on your way to top up your TFSA for a more secured future!

see your money grow!

see your money grow!

Best kept secret in retirement contribution investing … the SPP!

Did you know that you can contribute to a Saskatchewan Pension Plan (SPP) even if you don’t live in Saskatchewan?   Yes folks, this is absolutely true.

It is a plan that’s available to all Canadians who has RRSP contribution room.  You can contribute up to $2,500 a year.   In addition, you can also transfer in up to $10,000 a year from an existing RRSP plan.

Why SPP?

I like this plan because:
1)  it is easy to join;
2)  it is easy to contribute – you can opt for monthly contributions using your credit card;
3)  their management fees are attractively low;
4)  their balanced fund return is decent.   Check out the history here.   (Of course, you need to keep in mind that these rates are not guaranteed going forward.   They just show the plan’s past performance in investment returns.)

So give the SPP some serious consideration, and happy retirement planning!